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BAP WO-13-029 In Re Thomas, Nov. 13, 2013
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
November 13, 2013
Blaine F. Bates
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE CLARENCE THOMAS,
FEDERAL NATIONAL MORTGAGE
BAP No. WO-13-029
Bankr. No. 10-17039
Appeal from the United States Bankruptcy Courtfor the Western District of Oklahoma
Before KARLIN, ROMERO, and JACOBVITZ, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
The sole issue on appeal is whether the bankruptcy court’s finding that the
creditor presented sufficient evidence to establish it had a colorable claim to
enforce a promissory note was clearly erroneous. Because the finding is fully
supported by the evidence, we AFFIRM.1
* This unpublished opinion may be cited for its persuasive value, but is notprecedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8018-6.
The parties did not request oral argument, and after examining the briefsand appellate record, the Court has determined unanimously that oral argumentwould not materially assist in the determination of this appeal. See Fed. R.
The Appellant, Clarence Thomas (“Debtor”), appeals the bankruptcy
court’s order finding that Appellee, Federal National Mortgage Association
(“FNMA”) had standing, as “a party in interest,” to obtain an order under 11
U.S.C. § 362(j).2 This Court has jurisdiction to hear timely-filed appeals from
“final judgments, orders, and decrees” of bankruptcy courts within the Tenth
Circuit, unless one of the parties elects to have the district court hear the appeal.3
Neither party elected to have this appeal heard by the district court, thus
consenting to review by this Court.4
Debtor’s current appeal follows lengthy litigation in both Oklahoma state
court and the bankruptcy court, and it is Debtor’s second appeal in this case. Our
first order5 supplies much of the necessary background. It essentially recites that
in September 2007, Debtor executed a note and mortgage on a home. The lender
and note payee was Freedom Mortgage Corp. (“Freedom”) and the mortgagee was
Bankr. P. 8012. The case is therefore ordered submitted without oral argument.
2 When a debtor files bankruptcy, the automatic stay (11 U.S.C. § 362) stops
most collection actions against the debtor and property of the estate unless and
until a party in interest obtains relief from that stay. When Congress amended the
Bankruptcy Code in 2005, it added a provision (11 U.S.C. § 362(j)) to require
courts to issue comfort orders confirming the automatic stay had either terminated
or never arose in certain instances when successive cases were commenced by
repeat filers. “The orders are entered primarily for a third party’s benefit, often
to help a sister state court attempting to determine whether it can proceed with a
pending action, such as a foreclosure.” In re Hill, 364 B.R. 826, 828 (Bankr.
M.D. Fla. 2007).
3 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed R. Bankr. P. 8002.
4 Debtor filed a motion for leave to appeal the March 28, 2013 order on April11, 2013, 14 days after its entry, then filed an untimely notice of appeal on April12, 2013, 15 days after the entry. This Court issued an order to show cause for
timeliness, which was resolved by an order on May 29, 2013, construing themotion for leave as a timely notice of appeal, and denying the motion for leave as
5 In re Thomas, 469 B.R. 915, 917-18 (10th Cir. BAP 2012).
MERS, acting as Freedom’s nominee. Debtor defaulted on the loan after making
only 11 payments on the note. Soon thereafter, Freedom endorsed the note in
blank, making it a bearer instrument under Oklahoma law, and transferred
possession to Chase Home Finance, LLC (“Chase”). In February 2009, Chase
filed a state court foreclosure action against Debtor, resulting in a foreclosure
judgment in June 2009. Debtor did not appeal that order. Before the sheriff’s
sale could be completed, however, Debtor filed a previous Chapter 13 petition in
August 2009, but it was dismissed in August 2010.
Shortly after Debtor’s first bankruptcy case was dismissed, Chase
apparently transferred the original note and mortgage to FNMA. The assignment
of the note and mortgage to FNMA, which indicates an effective date of August
21, 2010, was recorded on September 13, 2010 (but stated the assignment was
from MERS to FNMA rather than from Chase to FNMA).
Debtor then filed the current Chapter 13 bankruptcy in November, 2010.
FNMA filed a proof of claim in the second bankruptcy and attached to its claim
copies of the note (without the endorsement by Freedom) and the recorded
assignment of mortgage from MERS to FNMA. Debtor objected to the claim and
also filed an adversary proceeding against Freedom, Chase, MERS, and FNMA,
seeking a declaration that none of the defendants had any enforceable secured
interest in the property.
Immediately after Debtor filed the adversary proceeding, FNMA sought a
comfort order verifying that the automatic stay had expired. On the same day, the
bankruptcy court entered the comfort order, “finding that [t]he stay imposed
against [FNMA] with regard to its lien on the Property terminated by operation of
law on December 22, 2010,” as Debtor had filed no motion to extend the stay.6
Debtor appealed the comfort order, arguing that the bankruptcy court
Id. at 918 (internal quotation marks omitted).
erroneously granted relief to FNMA without first establishing FNMA had
standing, and that FNMA, in fact, lacked standing to seek the comfort order.
Another panel of this Court agreed that the bankruptcy court had failed to
determine whether FNMA had standing before it issued the comfort order and
remanded the matter to the bankruptcy court to determine FNMA’s standing. In
so doing, we held that a party must be “a party in interest” under § 362(j) in order
to seek a comfort order.
Following remand, the bankruptcy court conducted an evidentiary hearing
concerning FNMA’s standing, both for the purposes of § 362(j) and with respect
to a number of other pending matters between the parties. At the hearing, FNMA
introduced into evidence the mortgage and the original note, blue ink signatures
affixed, along with testimony regarding the note’s admittedly convoluted chain of
title. Debtor argued the note might not be authentic, suggesting color copy
machines could churn out copies and maybe this was one of those. He refused to
verify that the signature on the note admitted into evidence was his signature. By
contrast, his wife testified the signatures on both the note and mortgage appeared
to be hers and her husband’s. In addition, the bankruptcy court required both
Debtor and his wife to produce their driver’s licenses for examination and, after
comparing the signatures on the licenses with the signatures on the note and
mortgage, concluded the signatures were “essentially identical.”7 The court also
compared the Debtor’s signature on pleadings he had filed in his bankruptcy case,
confirming the signatures were the same.8 Debtor produced no evidence to
suggest anyone else had the “real” original. The bankruptcy court ultimately
determined FNMA had physical possession of the original note, endorsed in
blank, and had standing to seek the comfort order. It is that determination Debtor
7 Aplt. App. at 102.
8 Id. at 103-04.
II. Issue and Standard of Review
In addressing Debtor’s last appeal, we held FNMA “must prove that it has a
colorable claim . . . in order to establish its standing to seek a § 362(j) comfort
order. Proof of the existence of a colorable claim in this case necessarily requires
[FNMA] to prove that it has a facially valid security interest under Oklahoma
law.”9 Our prior opinion also makes clear FNMA would be required to show it
had standing as of May 18, 2011, when it sought the comfort order.10
As the parties agree,11 under Oklahoma’s version of the Uniform
Commercial Code a note endorsed in blank is a bearer instrument that may be
enforced by its holder.12 The parties also agree the note submitted into evidence
at the evidentiary hearing was endorsed in blank and was held by FNMA. This
appeal, then, turns on two factual questions: 1) was the note submitted by
FNMA, which it claimed to be the original, authentic; and 2) did FNMA have
possession of the original note when it filed its pleadings on May 18, 2011.
The bankruptcy court’s factual findings underpinning a standing
determination are reviewed for clear error.13 Under the clearly erroneous
standard, we “will reverse the district court’s finding only if it is without factual
In re Thomas, 469 B.R. at 923 (internal quotation marks and footnote
10 Id. at 920.
11 Aplee. Br. at 9, Aplt. Reply Br. at 5.
12 In Oklahoma, one who is in possession of a note endorsed in blank is a
holder. Deutsche Bank Nat’l Trust Co. v. Richardson, 273 P.3d 50, 53 (Okla.
2012). See also Okla. Stat. tit. 12A, § 1-201(b)(21) (2006). The holder of a note
or a non-holder in possession of the note is entitled to enforce a note. MidFirst
Bank v. Wilson, 295 P.3d 1142, 1144 (Okla. Civ. App. 2012) (citing Okla. Stat.
tit. 12A, § 3-301 (1992)).
Merrill Lynch Bus. Fin. Servs., Inc. v. Nudell, 363 F.3d 1072, 1074 (10thCir. 2004) (holding jurisdictional findings of fact are reviewed for clear error).
support in the record or if, after reviewing all the evidence, we are left with a
definite and firm conviction that a mistake has been made.”14
III. Legal Analysis
Debtor’s arguments essentially boil down to two. First, he argues the
bankruptcy court erred when it determined the note was authentic because he
claims FNMA did not adequately explain how it came to be in possession of the
note, and because the note should not have been admitted into evidence as self-
authenticating under Rule 902(9) of the Federal Rules of Evidence. He next
argues that, absent any additional documentation from FNMA supporting its claim
that the note presented to the Court was, in fact, the original, it might not be the
one he actually signed, so FNMA should not be allowed to enforce it. Neither of
his arguments have merit.15
Both of Debtor’s arguments essentially address the sufficiency of the
evidence received by the bankruptcy court. Although Debtor correctly notes
FNMA did not offer additional documentary evidence beyond the note itself, the
bankruptcy court’s determinations that the note FNMA submitted was authentic
and that FNMA had timely possession of it, are amply supported by the record.
The record shows FNMA produced an apparently original note with blue ink
signatures by Debtor and his wife. And Debtor never denies he signed a note that
14 United States v. Madrid, 713 F.3d 1251, 1256-57 (10th Cir. 2013).
15 Debtor makes an additional argument that the bankruptcy court erred whenit found appellee had standing even though neither the endorsed note nor the statecourt judgment was attached to the proof of claim. He seems to claim that
because the documents attached to the proof of claim did not show FNMA ownedthe note when it filed the proof of claim, FNMA is thus prevented from laterpursuing a comfort order. But this appeal concerns only whether FNMA hadestablished a colorable claim of standing to enforce the note and mortgage at thetime it sought the comfort order. That is all FNMA was required to prove toobtain its § 362(j) comfort order. Whether Debtor could ultimately prevail on hisobjection to that claim is simply immaterial to this analysis. In addition, thisargument is basically just another version of the argument we have addressed andrejected–that the existence of a convoluted chain of title for this note somehowprevents FNMA from enforcing the bearer paper it clearly now possesses.
looked just like the one admitted into evidence, only that he would never be able
to definitively agree that the exhibit is the one he actually signed because of
“sophisticated” copiers. But the bankruptcy judge reviewed the note offered into
evidence, and then carefully verified the signatures by comparing them with
Debtor’s and his wife’s drivers’ licenses and with other court documents. Based
on his careful review, he determined to his own satisfaction that the note was in
fact the original signed by Debtor.
The bankruptcy court’s decision was buttressed by the testimony from an
attorney (Michael George) who represented FNMA in some of its prior dealings
on this note. He testified he was familiar with this case and he had personally
received the original note from the custodian for Chase on or about July 16, 2010.
This extrinsic evidence, taken as a whole, also supports the bankruptcy court’s
factual determination. Nothing in the record convinces us that any error has been
made, let alone clear error.
Debtor argues the bankruptcy court erred by admitting the note into
evidence as a self-authenticating document under Rule 902(9); this argument fails
for two reasons. First, the note is a self-authenticating document. Under Rule
902(9), commercial paper, signatures on commercial paper, and related
documents are self authenticating to the extent allowed by general commercial
law.16 The relevant portion of the Oklahoma version of the Uniform Commercial
Code provides in pertinent part:
In an action with respect to an instrument, the authenticity of, andauthority to make, each signature on the instrument is admittedunless specifically denied in the pleadings. If the validity of asignature is denied in the pleadings, the burden of establishingvalidity is on the person claiming validity, but the signature ispresumed to be authentic and authorized unless the action is toenforce the liability of the purported signer and the signer is dead orincompetent at the time of trial of the issue of validity of the
Fed. R. Evid. 902(9).
The note is an instrument.18 Here, Debtor cannot point to any denial of the
authenticity of the signatures on the note in his pleadings, and so the authenticity
of the signatures to the note are deemed admitted, rendering the note itself
authentic. And second, even if the note were not self-authenticating, the record
offers ample basis for its admission under Rule 901(a). As discussed above,
FNMA”produce[d] evidence sufficient to support a finding that the item is what
the proponent claims it is.”19 Accordingly, the bankruptcy court did not err in
admitting the note.
Finally, Debtor argues the bankruptcy court’s decision relies on a chain of
title to the note that conflicted with FNMA’s evidence and past filings. In
particular, Debtor focuses on how Chase Bank fits into the evidence, contending
FNMA asserted it took possession of the note in 2007, while a 2009 state court
judgment determined Chase was the owner of the note at that time and an
assignment of the note and mortgage recorded on September 13, 2010, states
(apparently incorrectly)20 that the assignment was from MERS to FNMA.
Without a doubt, this history is convoluted, and, in some aspects, contradictory.
But nothing about the chain of title convinces us the court erred when it
determined the note admitted into evidence was the original and FNMA possessed
the original note when it sought the comfort order. Debtor simply cannot explain
how Chase’s prior involvement detracts from the fact that FNMA now holds the
original note and, as the holder of bearer paper, has the right to enforce the note.
17 Okla. Stat. tit. 12A, § 3-308(a) (1992).
18 Okla. Stat. tit. 12A, § 3-104 (1992).
19 Fed. R. Evid. 901(a).
20 In re Thomas, 469 B.R. at 918 (stating the assignment listed MERS but
should have listed Chase).
Under any of the various histories offered by FNMA, it was in possession
of the original note by, at the latest, July 2010—eleven months before it sought
the comfort order, and Debtor presented no evidence remotely suggesting any
other potential note holders have made any claim to the note or demand upon
him.21 As the Tenth Circuit has recently confirmed, FNMA need only “satisf[y]
the low threshold showing that it possessed a colorable claim of a lien on property
of the estate,”22 and the creditor’s conflicting positions regarding the note’s chain
of title does not diminish the fact that FNMA is in possession of the facially valid
original note.23 Mere physical possession of the authentic note is all that is
required for a colorable claim of standing to enforce the note and mortgage and
all that is required to seek a § 362(j) comfort order. The ambiguities in the note’s
chain of title are simply immaterial in this context.
At their core, Debtor’s arguments all assert that although the note produced
by FNMA looks real and the signature looks like his signature, and he did in fact
execute an identical note and mortgage with the same terms, and no one has
sought to collect the note from him other than FNMA (and before it, Chase), the
current note could be fake, or FNMA may have obtained it in such a way that it
cannot enforce it. But these claims, weak as they are, are more appropriately
raised in state court. As we stated in our prior decision, “stay proceedings only
determine whether the party seeking relief has a colorable claim, which is then
21 Chase, the only party that might be in a position to argue for an interest,
has specifically denied any current interest in the note and mortgage, stating ithad transferred possession of those documents to FNMA between Debtor’s 2009and 2010 bankruptcy filings. Aplt. App at 113.
22 In re Castro, 503 F. App’x 612, 615 (10th Cir. 2012) (internal quotationmarks omitted).
fully adjudicated in the state court.”24 Here, it is clear FNMA has established at
least a colorable claim of standing.
Based on the foregoing analysis, the bankruptcy court did not err in finding
FNMA had standing to seek a comfort order. Accordingly, we AFFIRM.
In re Thomas, 469 B.R. at 922-23 (internal quotation marks omitted).
- Category: Judge Karlin
- Published on 08 November 2013
- Written by Judge Karlin
- Hits: 76
BAP UT-13-026 In Re C.W. Mining Company, Nov. 5, 2013
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
November 5, 2013
Blaine F. Bates
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE C.W. MINING COMPANY,
KENNETH A. RUSHTON, Trustee,
Plaintiff – Appellant,
SMC ELECTRICAL PRODUCTS, INC.
and BECKER MINING AMERICA,
Defendants – Appellees.
BAP No. UT-13-026
Bankr. No. 08-20105
Adv. No. 10-02758
Appeal from the United States Bankruptcy Courtfor the District of Utah
Michael N. Zundel (Daniel C. Dansie and Callie Buys with him on the brief) ofPrince, Yeates & Geldzahler, Salt Lake City, Utah, for Plaintiff – Appellant.
Jeffrey L. Shields (Jacob D. Lyons with him on the brief) of Callister Nebeker &
McCullough, Salt Lake City, Utah, for Defendants – Appellees.
Before CORNISH, KARLIN, and ROMERO, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
This case poses the question, “how ordinary is ordinary?” The ordinary
course of business defense, set out in 11 U.S.C. § 547(c)(2)(A), protects the
creditor of a debtor who has filed bankruptcy from an action by a trustee to
recover, as a preference, payments made by the debtor prior to bankruptcy as long
as the creditor can meet two requirements. First, the creditor must show that the
alleged preferential payment was made “in payment of a debt incurred by the
debtor in the ordinary course of business” of the debtor and the creditor. The
creditor must then also show that the payment itself was “made in the ordinary
course of business” of the debtor and the creditor.
This appeal is from a bankruptcy court order applying the ordinary course
of business defense to a payment made by Debtor C.W. Mining Company (“C.W.
Mining”) to Creditor SMC Electrical Products, Inc. (“SMC”) within 90 days of
C.W. Mining being placed in involuntary bankruptcy. The Chapter 7 Trustee
challenged the payment as a preferential transfer, but after full discovery, the
bankruptcy court granted SMC’s motion for summary judgment based on
unchallenged material facts that it held demonstrated SMC was entitled to the
ordinary course of business defense.
The Trustee/Appellant argues that the bankruptcy court erred in both its
conclusions that: (1) the debt between SMC and C.W. Mining was incurred in the
ordinary course of business of SMC and C.W. Mining, and (2) the debt payment
that the Trustee seeks to avoid was a payment made in the ordinary course of
these two businesses. We conclude both that C.W. Mining incurred the debt from
SMC in an effort to increase the production of its coal mining operations, which
was C.W. Mining’s primary business, and that the transaction was a typical arms-
length creation of debt on the open market. The bankruptcy court did not err
when it found that the debt was incurred in the ordinary course of business. In
addition, the evidence supports the bankruptcy court’s finding that the challenged
debt payment was made in the ordinary course of both businesses. Applying the
clearly erroneous standard of review, the bankruptcy court had adequate factual
support in the record to conclude that SMC carried its burden of proof to show
that the debt payment was incurred and made in the ordinary course of both
businesses. As a result, we AFFIRM.
I. Background Facts and Procedural History
The following facts were established by an affidavit filed by SMC, which
the Trustee essentially elected not to challenge. In mid-2007, C.W. Mining
sought to purchase a longwall electrical system from SMC. 1 Before then, C.W.
Mining had engaged in continuous mining, a form of coal mining that is different
from the longwall mining method. 2 Presumably to reduce its costs of engaging in
this new method of coal mining, C.W. Mining elected to purchase previously
scrapped equipment and to then refurbish that equipment for a new longwall
system. C.W. Mining anticipated that the longwall system would increase its coal
production by four or five times.
In June 2007, SMC and C.W. Mining agreed that SMC would provide C.W.
Mining the equipment, service, and training for a longwall electrical system. The
provision of longwall electrical controls, and the service and training on longwall
electrical systems, are within the normal scope of products and services that SMC
provides. In July 2007, SMC provided C.W. Mining with a quotation (Quotation
70312.3) that reflected the June 2007 agreement. Prior to the 2007 purchase,
C.W. Mining had no relationship of any kind with SMC.
Quotation 70312.3 did not specify due dates for payments by C.W. Mining,
but it did provide that additional charges could be applied to any amount not paid
within thirty days of the invoice date. In addition, Quotation 70312.3 required
progress payments as follows: 15% due within 7 days, 25% due upon issuance of
submittals, 25% due upon release of manufacturing, 25% due upon completion of
1 A longwall electrical system is part of the implementation of a longwall
mining system, a form of underground coal mining where a long wall of coal ismined in a single seam. See Plateau Mining Corp. v. Fed. Mine Safety & Health
Review Comm’n, 519 F.3d 1176, 1178 (10th Cir. 2008) (describing operation of a
2 The Trustee freely admitted at oral argument that both methods of mining
result in the production of coal.
testing, and 10% due upon completion of commissioning. The payment terms
between SMC and C.W. Mining were typical of the progress payment terms SMC
had with its other customers. This “pay as you go” or “progress payment”
schedule was typical for longwall system purchases at the time.
On September 18, 2007, SMC issued to C.W. Mining an invoice for
$805,539.75, representing the cost of the majority of the equipment and services
it had provided or was to provide. That invoice, as well as other invoices SMC
issued to C.W. Mining, indicated the terms of payment as “special,” to reflect the
fact that C.W. Mining was to make progress payments as it received invoices
from SMC. Although the Trustee argues the term “special” is itself reflective that
this transaction was not “ordinary,” he introduced no expert or other testimony in
opposition to demonstrate that this term meant anything other than what SMC
For its customers, like C.W. Mining, who were making progress payments,
SMC prepared and maintained two different sets of invoices, one internal and one
external. The internal invoices were used for internal accounting purposes only,
and were not typically issued to a customer. On October 16, 2007, C.W. Mining
made payment by wire transfer, in the amount of $200,000, on the September 18,
2007 external invoice. SMC credited this payment to its internal invoice.
The October 2007 payment was one of five wire transfer payments made
between September 27, 2007 and October 23, 2007, and applied to the September
18, 2007 invoice. The five payments came from three different sources: C.W.
Mining’s own account, the account of C.W. Mining’s accounts payable service
provider, and the account of Standard Industries, another company doing business
with C.W. Mining, using proceeds from the coal mined by C.W. Mining. It was
not unusual for SMC’s customers to make multiple payments on a single invoice,
particularly when an invoice exceeded $250,000. It was also not unusual for
SMC to receive payment from entities affiliated with or directed by its customers.
Other than the terms of the purchase contract between SMC and C.W. Mining,
SMC was not aware of how or why C.W. Mining decided to make multiple
payments on the September 18, 2007 invoice. Further, SMC had no knowledge of
how or why C.W. Mining decided to have payments made to SMC from multiple
The payment C.W. Mining made in October 2007 was made twenty-eight
days after SMC issued the September 18, 2007 invoice. In SMC’s experience,
payment within this time frame was typical for its customers. Further, other than
its original agreement with C.W. Mining, SMC did not provide any instructions to
C.W. Mining or its representatives or affiliates regarding the form, manner, or
time of payments on the longwall electrical system. SMC also made no demands
upon C.W. Mining of any kind related to payment. In addition, SMC is not aware
why or how decisions were made by C.W. Mining regarding the manner, form,
and timing of payments to SMC.
The bankruptcy court specifically found that neither early payment nor
partial payment was inconsistent with the agreement SMC and C.W. Mining had
made. The bankruptcy court also found that the October 2007 payment was made
in accordance with the longwall system purchase agreement between SMC and
C.W. Mining. Finally, the bankruptcy court found that SMC did not engage in
any coercive collection activity with regard to the October 2007 payment.
On January 8, 2008, several months after C.W. Mining had purchased the
longwall electrical system from SMC and just under 90 days since it made the
October 2007 payment, C.W. Mining was involuntarily placed into bankruptcy.
The involuntary bankruptcy was precipitated by a judgment obtained by Aquila,
Inc. against C.W. Mining on October 30, 2007. 3 Although C.W. Mining remained
The October 30, 2007 judgment stemmed from a July 5, 2005 lawsuit by
Aquila against C.W. Mining for breach of a coal supply agreement.
in the Chapter 11 bankruptcy for some time, the case was later converted to
The parties have never disputed that the transfer was a preference, instead
only disputing whether the § 547(c)(2) ordinary course of business defense
applied. 4 After the lengthy period of discovery, the bankruptcy court granted
summary judgment to SMC and dismissed the adversary proceeding.
II. Jurisdiction and Standard of Review
This Court has jurisdiction to hear timely filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
unless one of the parties elects to have the district court hear the appeal. 5 Neither
party elected to have this appeal heard by the United States District Court for the
District of Utah. The parties have therefore consented to appellate review by this
Court. The Trustee timely appealed the decision, and the bankruptcy court’s
order is an appealable, final order.6
This Court reviews the bankruptcy court’s legal conclusions de novo and its
findings of fact under the “clearly erroneous” standard of review. 7 The Tenth
Circuit has assessed the application of the ordinary course of business defense as
4 “The ‘ordinary course’ of business exception in § 547(c)(2) is an
affirmative defense to an avoidance procedure.” Jagow v. Grunwald (In re Allied
Carriers’ Exch., Inc.), 375 B.R. 610, 615 (10th Cir. BAP 2007).
5 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8001, 8002;
10th Cir. BAP L.R. 8001-3.
6 See Elec. Metal Prods., Inc. v. Bittman (In re Elec. Metal Prods., Inc.), 916
F.2d 1502, 1503 (10th Cir. 1990) (appeal of summary judgment in adversaryproceeding to recover a preference); Gonzales v. Conagra Grocery Prods. Co. (In
re Furr’s Supermarkets, Inc.), 373 B.R. 691, 697 (10th Cir. BAP 2007) (holdingthat an order of a bankruptcy court concluding a preference action was a final,
7 In re Robinson, 295 B.R. 147, 149 (10th Cir. BAP 2003).
“primarily factual” and applied the clearly erroneous standard of review. 8 A
factual finding is clearly erroneous only “if it is without factual support in the
record or if, after reviewing all the evidence, we are left with the definite and
firm conviction that a mistake has been made.”9
A. Burden of Proof
SMC, as the transferee of the payment from C.W. Mining, bears the burden
of proving the ordinary course of business defense. 10 The ordinary course of
business defense should be narrowly construed.11
B. Application of Ordinary Course of Business Defense
The sole issue on appeal is the application of the ordinary course of
business defense of 11 U.S.C. § 547(c)(2). That subsection states:
(c) The trustee may not avoid under this section a transfer–
. . .
(2) to the extent that such transfer was in payment of a debtincurred by the debtor in the ordinary course of business orfinancial affairs of the debtor and the transferee, and suchtransfer was–
8 Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners),
12 F.3d 1549, 1553 (10th Cir. 1993); see also Jobin v. McKay (In re M & L Bus.
Mach. Co.), 84 F.3d 1330, 1339 (10th Cir. 1996) (“On this factual question[concerning application of § 547(c)(2)], we must accept the conclusions of thebankruptcy court unless they are clearly erroneous.”); In re Allied Carriers’
Exch., Inc., 375 B.R. at 616 (“The bankruptcy court’s determination that thetransaction at issue fell within the ordinary course of business exception of
§ 547(c)(2) is a question of fact, reversible only if clearly erroneous.”).
9 In re Miniscribe Corp, 309 F.3d 1234, 1240 (10th Cir. 2002) (internal
quotation marks omitted); see also Fed. R. Bankr. P. 8013 (“Findings of fact,
whether based on oral or documentary evidence, shall not be set aside unlessclearly erroneous[.]”).
10 In re M & L Bus. Mach. Co., 84 F.3d at 1339; see also 11 U.S.C. § 547(g)
(“For the purposes of this section, . . . the creditor or party in interest againstwhom recovery or avoidance is sought has the burden of proving thenonavoidability of a transfer under subsection (c) of this section.”).
11 In re M & L Bus. Mach. Co., 84 F.3d at 1339.
(A) made in the ordinary course of business or financialaffairs of the debtor and the transferee; or
(B) made according to ordinary business terms[.]12
The purpose of the preference statute is to both “prevent creditors from exerting
undue pressure on struggling debtors” and to “discourage ‘unusual action’ that
might ‘favor certain creditors or hasten bankruptcy by alarming other creditors
and motivating them to force the debtor into bankruptcy to avoid being left
out.’” 13 The “general purpose of the § 547(c)(2) defense” to the preference
action, however, is “‘to leave undisturbed normal financial relations, because it
does not detract from the general policy of the preference section to discourage
unusual action by either the debtor or his creditors during the debtor’s slide into
bankruptcy.’” 14 The fact that there is no prior history between the parties –the
parties here had not engaged in business prior to the longwall electrical system
purchase in mid-2007– does not preclude the application of § 547(c)(2).15
Although “ordinary course of business” is not defined in the Bankruptcy
12 SMC elected to proceed exclusively under § 547(c)(2)(A), and therefore
subsection (c)(2)(B) of § 547 is not relevant to this appeal.
13 Milk Palace Dairy LLC v. L & N Pump, Inc. (In re Milk Palace Dairy
LLC), 385 B.R. 765, 771 (10th Cir. BAP 2008) (quoting In re Meridith Hoffman
Partners, 12 F.3d at 1553).
14 In re M & L Bus. Mach. Co., 84 F.3d at 1339-40 (quoting In re Meridith
Hoffman Partners, 12 F.3d at 1553). See also Barnhill v. Johnson, 503 U.S. 393,402 (1992) (stating that § 547(c) was “designed to encourage creditors to continueto deal with troubled debtors on normal business terms by obviating any worrythat a subsequent bankruptcy filing might require the creditor to disgorge as apreference an earlier received payment”).
15 See In re Hedged-Invs. Assocs., Inc., 48 F.3d 470, 471-72, 475-76 (10th
Cir. 1995) (applying § 547(c)(2) when the only payment made to the creditor wasa single payment during the preference period, and concluding that the one-timetransfer to creditor/investor in Ponzi scheme was not made in ordinary course ofbusiness); see also Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.
2003) (observing that most courts “side with the view that a first-time transactionis not per se ineligible for protection from avoidance under § 547(c)(2)”); Gosch
v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir. 1990) (stating that the issuanceof a debt “can be in the ordinary course of financial affairs even if it is the firstsuch transaction undertaken by the [parties]”).
Code, the statute clearly has two prongs: whether the debt was incurred in the
ordinary course of business of the debtor and creditor, and whether the debt
payment was made in the ordinary course of business of the debtor and creditor.
The first prong is focused on the original transaction between C.W. Mining and
SMC when the debt was created. Regarding the “incurred” part of the § 547(c)(2)
question, a leading bankruptcy treatise states:
[C]ourts generally are interested in whether the debt was incurred ina typical, arms-length commercial transaction that occurred in themarketplace . . . . If the debt were incurred in the routine operation ofthe debtor and the creditor, then it can be said to have been incurredin the ordinary course of each party’s business . . . . [A] debt will notbe considered incurred in the ordinary course of business if creationof the debt is atypical, fraudulent or not consistent with an arms-
length commercial transaction.16
This Court must decide, therefore, whether the bankruptcy court was correct to
conclude that the debt for the longwall electrical system was incurred by C.W.
Mining in the ordinary course of both the business of C.W. Mining and of SMC.
The Trustee argues that because the debt arose from C.W. Mining’s
purchase from SMC of a longwall electrical system of mining –a type of mining
different from the type of mining C.W. Mining had previously used– the debt
could not have been incurred in the ordinary course of business. In other words,
the Trustee argues that the debt could not have been incurred in the ordinary
course of C.W. Mining’s coal mining business because the debt was for a
longwall coal mining system, not to support a continuous coal mining system.
The Trustee also argues that the longwall electrical system purchase was itself
extraordinary, because C.W. Mining sought to build the longwall system from
refurbished parts –a task for which it had no prior experience.
Decisions from the Tenth Circuit Court of Appeals have not discussed the
“incurred” prong of the ordinary course of business defense. However, in an oft
5 Collier on Bankruptcy ¶ 547.04[a][i] (Alan N. Resnick & Henry J.
Sommer eds., 16th ed. 2013).
cited bankruptcy court opinion addressing this prong, Huffman v. New Jersey
Steel Corp. (In re Valley Steel Corp.), 17 the bankruptcy court stated: “courts
generally are interested in whether or not the debt was incurred in a typical, arms-
length commercial transaction that occurred in the marketplace, or whether it
occurred as an insider arrangement with a closely-held entity.” 18 The Valley Steel
Corp court specifically noted that the “transaction need not have been common; it
need only be ordinary.”19
The decisions of those circuits addressing the “incurred” prong of the
ordinary course of business defense have used similar reasoning to that expressed
in Valley Steel Corp. The Sixth Circuit concluded that the “incurring of long-
term consumer debt that is a ‘normal financial relation’ and that is not ‘unusual
action’” met the requirement that debt be incurred in the ordinary course of
business. 20 The Ninth Circuit has similarly focused on “whether the debt [was
incurred] similar to what we would expect of similarly situated parties.” 21 On the
other side of the coin, the Eighth Circuit found that a gambling debt was not
incurred in the ordinary course of business because the debt was not incurred to
“preserve ‘normal financial relations,’” but, rather, was “a desperate debtor’s
irresponsible accumulation of gambling debts in an ill-fated attempt to cover
fraud and embezzlement losses.”22
The Trustee does not dispute either that C.W. Mining was a mining
company or that SMC is a mining equipment vendor. The Trustee also does not
17 182 B.R. 728 (Bankr. W.D. Va. 1995).
18 Id. at 735.
19 Id. (internal quotation marks omitted).
20 In re Finn, 909 F.2d at 907.
21 In re Ahaza Sys., Inc., 482 F.3d 1118, 1126 (9th Cir. 2007).
22 In re Armstrong, 291 F.3d 517, 527 (8th Cir. 2002).
dispute that C.W. Mining incurred the debt from SMC in an effort to increase its
coal mining production, i.e., its primary business purpose. Although we
acknowledge that the ordinary course of business defense “should be narrowly
construed,” 23 the Trustee’s focus is misplaced. The bankruptcy court was not
tasked with judging the business decisions of C.W. Mining in determining
whether debt was incurred in the ordinary course of business. Rather, the
bankruptcy court only had to determine whether the debt was incurred ordinarily
between C.W. Mining and SMC. As a result, the bankruptcy court properly
focused on the creation of the debt at issue, asking whether the transaction was a
typical arms-length creation of debt in the open market. The Trustee challenged
none of the facts that demonstrated it was such an arms-length transaction in the
open market by previously unrelated companies.
The second prong of the ordinary course of business defense –whether a
debt payment is made in the ordinary course of business –requires that the
creditor asserting that the payment was made in the ordinary course of business
“establish that the disputed payment was ‘ordinary’ . . . as between the parties.”24
In Milk Palace Dairy, we analyzed four factors: “1) the length of time involved
in the preference period transaction; 2) whether the amount or the form of that
payment differed from previous practice; 3) whether that transaction involved any
unusual collection or payment activity; and 4) the circumstances under which the
23 Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th
24 Milk Palace Dairy LLC v. L & N Pump, Inc. (In re Milk Palace Dairy
LLC), 385 B.R. 765, 769 (10th Cir. BAP 2008). Prior to the 2005 amendments to
the Bankruptcy Code (oft-referred to as “BAPCPA,”), a creditor was required toshow that a transfer was ordinary both subjectively and objectively. The
BAPCPA amendments to § 547(c)(2) changed the requirements so that thecreditor could show either subjective ordinariness or objective ordinariness, but
need not show both. See id. at 769 n.6 (explaining BAPCPA’s amendments).
SMC proceeded with the subjective prong of ordinariness, under § 547(c)(2)(A),
rather than (c)(2)(B) –focusing only on whether the transfer was made in theordinary course of business of C.W. Mining and SMC.
transfer was made.” 25 Ordinariness is judged both from the perspective of the
debtor and the transferee. 26 Ordinary business terms “are those used in ‘normal
financing relations’: the kinds of terms that creditors and debtors use in ordinary
circumstances, when debtors are healthy.”27
Here, the Trustee asserts the payment was not ordinary because the five
payments made from C.W. Mining to SMC came from different C.W. Mining-
related accounts. The Trustee also asserts error because the amounts that were
paid from C.W. Mining to SMC did not precisely correspond to an invoice
amount or a progress payment. The Trustee claims these facts show that the
amounts and sources of tender differed from past practice, and that as a result,
C.W. Mining engaged in unusual payment activity. Finally, the Trustee claims
the bankruptcy court erred in not considering that shortly after C.W. Mining made
the October, 2007 payment to SMC, Aquila received a substantial money
judgment against C.W. Mining. 28 The Trustee argues that the existence of that
judgment supports a finding that the circumstances under which the October,
2007 payment was made were unusual.
We must again note that the Trustee did not challenge the affidavit SMC
used to support the facts upon which it based its claim for summary judgment.
That affidavit established that the payment terms between SMC and C.W. Mining
were typical of SMC’s progress payment terms with other customers, and that the
“pay as you go” schedule was typical for longwall electrical system purchases.
25 Id. at 769.
26 Gonzales v. Amplex Corp. (In re Furr’s Supermarkets, Inc.), NM-06-109,
2007 WL 2827459, at *9 (10th Cir. BAP Sept. 26, 2007).
27 Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners),
12 F.3d 1549, 1553 (10th Cir. 1993).
28 The $24 million judgment for Aquila was entered against C.W. Mining on
October 30, 2007.
The invoice from SMC to C.W. Mining was large, and SMC established that it
was not at all unusual for its customers to make multiple payments on a single
invoice, particularly with invoices over $250,000. Further, SMC’s affidavit
established that the payments by C.W. Mining from multiple accounts were not
unique; SMC specifically stated that it was not unusual to receive payment from
entities affiliated with or directed by its customers. SMC’s affidavit also
established that the October 2007 payment was made 28 days after receiving the
invoice upon which it was based, and that in SMC’s experience, payment within
this time frame was typical for its customers.
It is also important that SMC established it did nothing to solicit the
October 2007 payment from C.W. Mining. The bankruptcy court specifically
found that other than negotiate the original contract terms reflected in Quotation
70312.3, SMC did not provide any instructions to C.W. Mining or its
representatives or affiliates regarding the form, manner, or time of payments, nor
did SMC make demands of any kind upon C.W. Mining related to payment. The
bankruptcy court specifically found that SMC did not engage in coercive
collection activity with regard to the October 2007 payment. The Trustee points
to no evidence to contradict these facts; he simply would prefer a different
conclusion be drawn from those facts. There is no basis, however, to do so.
We have previously noted that although a payment for “significantly less
than the total due” was an indication that a transaction was not subjectively
ordinary, the facts that “[t]here was no collection activity with respect to the
disputed payment, no pressure put on Debtor to pay, nor any other apparent
change in the parties’ dealings with respect to [the] payment” indicated a
transaction was subjectively ordinary. 29 We have also previously held that
payment by cashier’s check in an attempt to maintain friendly relations with
In re Milk Palace Dairy, LLC, 385 B.R. at 769, 770.
creditors was not unusual, because it was not unusual for the transferee to receive
payment by cashier’s check, and because the transferee did nothing to solicit the
payment. 30 The payment from C.W. Mining to SMC was similar to the payments
in these cited cases; it was a payment made shortly before bankruptcy, but with
no other unusual factor surrounding it.
The evidence clearly supports the bankruptcy court’s finding that the
October 2007 payment was made in the ordinary course of business of C.W.
Mining and of SMC. There is nothing about the terms of that payment, or the
parties’ interactions surrounding the payment, that make the October 2007
payment unusual or extraordinary. Further, there was no implicit or explicit
pressure put on C.W. Mining by SMC. Applying the clearly erroneous standard
of review, the factual record supports the bankruptcy court’s conclusion that SMC
carried its burden of proof to show that the October 16, 2007 payment was
incurred and made in the ordinary course of business of C.W. Mining and SMC.31
Because we conclude that the bankruptcy court properly applied the
ordinary course of business defense of 11 U.S.C. § 547(c)(2)(A) to the facts of
this case, we affirm the bankruptcy court’s order entering judgment for SMC.
30 Tomlins v. BRW Paper Co., Inc. (In re Tulsa Litho Co.), 229 B.R. 806, 81011
(10th Cir. BAP 1999).
31 Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th
Cir. 1996) (transferee has burden of proof); In re Miniscribe Corp, 309 F.3d1234, 1240 (10th Cir. 2002) (finding is clearly erroneous only when “it is withoutfactual support in the record or if, after reviewing all the evidence, we are leftwith the definite and firm conviction that a mistake has been made” (internalquotation marks omitted)).
- Category: Judge Karlin
- Published on 22 October 2013
- Written by Judge Karlin
- Hits: 119
In Re H D Gerlach Company Inc, 12-40685 (Bankr. D. Kan. Oct. 17, 2013) Doc. # 330
SIGNED this 17th day of October, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 12-40685
HD Gerlach Company, Inc., Chapter 11
Memorandum Opinion and Order Denying Creditor Central National
Bank’s Motion to Vacate
Creditor Central National Bank (“Central”) moves this Court to vacate
its March 27, 2013, Order Granting Second Motion to Use Cash Collateral
(“Cash Collateral Order”),1 pursuant to Federal Rule of Civil Procedure 60(b).2
Central appealed the Cash Collateral Order to the District Court, but, before
the appeal was decided, Central and HD Gerlach Company, Inc. (“Debtor”)
entered a settlement that addressed all of their disputes, including the
1 Doc. 206.
2 Doc. 316.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 1 of 8
appeal. Central argues that because the controversy underlying the order has
become moot due to the settlement, vacating the order is the only way to
preserve the rights of the parties, and ensure that, if necessary, relitigation of
this issue would be possible at a later date. Because the Court finds that
Central does not meet its burden to demonstrate that extraordinary
circumstances justify vacation of the order, the Court denies the motion.
I. Factual and Procedural Background
Debtor filed its Chapter 11 petition on May 9, 2012. Central is3 a
secured creditor of the Debtor by virtue of a promissory note and a real estate
mortgage in the property commonly known as Wanamaker 22 Apartments
(Apartments). Along with the filing of the bankruptcy petition, the Debtor
filed a Motion for Turnover of Estate Property (rents from the Apartments)
and a Motion to Allow Debtor to Use Cash Collateral.4 Central and the Debtor
initially reached an agreement surrounding the treatment of the rents and an
agreed order was entered on June 7, 2012.5
3 It is possible that by now, the proper verb to use in this sentence is “was,” becausethe Court signed a sale order on September 27, 2013 that called for Central to be paid infull from the sale of Debtor’s principal asset—the Apartments. As a result of this sale andpayoff of Central’s note, therefore, it appears highly unlikely that the main basis for this
motion—maintaining the ability of the parties to relitigate this issue—remains as a possible
basis for the motion.
4 Doc. 8.
5 Doc. 45.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 2 of 8
The agreed order expired according to its terms on November 5, 2012,
so Debtor filed a second motion to use cash collateral before that deadline.6
Central objected. Following briefing by the parties, the Court entered its Cash
Central timely appealed that Cash Collateral Order. Around the same
time, the Court ordered the parties to mediation on all issues pending
between Central and the Debtor. Due to the significant progress made at the
mediation, the parties informally agreed to place all pending matters and
disputes on hold while working toward a resolution. Ultimately, the parties
reached a full and final settlement agreement on June 3, 2013; the agreement
resolved all matters pending between the parties both in the bankruptcy
court and in the appeal. Pursuant to the terms of the settlement, the parties
agreed that the controversy addressed in the Cash Collateral Order, together
with the pending appeal of that order, were moot, and Debtor agreed not to
oppose any motion to vacate the underlying Cash Collateral Order that
Central might elect to file.
Central has now filed the contemplated motion to vacate, and, in
accordance with the parties’ settlement agreement, Debtor’s counsel does not
6 Doc. 107.
7 Doc. 206.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 3 of 8
oppose the order Central has requested this Court sign to vacate the Cash
The Supreme Court addressed the question of vacatur of an underlying
order after settlement moots the appeal in U.S. Bancorp Mortgage Co. v.
Bonner Mall Partnership. 8 In Bancorp, U.S. Bancorp Mortgage Co.
(“Bancorp”) sought and was granted a writ of certiorari for an appeal, but
after briefing on the merits was completed, the parties stipulated to a
consensual plan of reorganization. The Bankruptcy Court handling the
underlying bankruptcy case approved the settlement, and the parties agreed
that confirmation of the plan constituted a settlement that mooted the
appeal. As a result, Bancorp requested the Supreme Court vacate the
judgment of the Court of Appeals, which had been adverse to Bancorp. The
appellee Bonner Mall Partnership opposed the motion, so the Supreme Court
came to again write on the topic of vacatur.
The Supreme Court held that “[w]here mootness results from
settlement, . . . the losing party has voluntarily forfeited his legal remedy by
8 513 U.S. 18 (1994). Surprisingly, all the citations upon which movant relies tosupport its vacatur motion predate 1994, the date of this controlling decision, in spite ofample more recent Tenth Circuit precedent and this controlling Supreme Court decision.
This more recent precedent, which Central elected not to provide this Court, does not
Case 12-40685 Doc# 330 Filed 10/17/13 Page 4 of 8
the ordinary processes of appeal or certiorari, thereby surrendering his claim
to the equitable remedy of vacatur.”9 The Court noted that
[i]t is petitioner’s burden, as the party seeking relieffrom the status quo of the appellate judgment, todemonstrate not merely equivalent responsibility forthe mootness, but equitable entitlement to theextraordinary remedy of vacatur. Petitioner’s voluntaryforfeiture of review constitutes a failure of equity thatmakes the burden decisive, whatever respondent’sshare in the mooting of the case might have been.10
The Court also noted the public interest served by leaving precedent in place,
commenting that such precedents are “valuable to the legal community as a
whole. They are not merely the property of the private litigants.”11 The
Supreme Court held, in response to arguments that the policy of encouraging
settlement required vacatur, that easy access to vacatur “may deter
settlement at an earlier stage. . . . [The Court found it] quite impossible to
assess the effect of [the] holding, either way, upon the frequency or systemic
value of settlement.”12
Finally, the Court held that:
9 Id. at 25.
10 Id. at 26.
11 Id. (quoting Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips Corp., 510
U.S. 27, 40 (1993).
Id. at 28.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 5 of 8
mootness by reason of settlement does not justifyvacatur of a judgment under review. This is not to saythat vacatur can never be granted when mootness isproduced in that fashion. As we have described, thedetermination is an equitable one, and exceptionalcircumstances may conceivably counsel in favor of sucha course. It should be clear from our discussion,
however, that those exceptional circumstances do notinclude the mere fact that the settlement agreementprovides for vacatur—which neither diminishes thevoluntariness of the abandonment of review nor alters
any of the policy considerations we have discussed. Ofcourse even in the absence of, or before considering theexistence of, extraordinary circumstances, a court ofappeals presented with a request for vacatur of adistrict-court judgment may remand the case withinstructions that the district court consider the request,
which it may do pursuant to Federal Rule of CivilProcedure 60(b).13
Thus the Supreme Court has clearly established that, absent exceptional
circumstances, a court should not vacate a prior order rendered moot by
reason of settlement, and settlement alone does not constitute exceptional
And while the Supreme Court’s summary seems to leave open the
possibility that a district or bankruptcy court might allow vacatur with some
lower burden, the Tenth Circuit has since shut that door. In Rio Grande
Silvery Minnow v. Bureau of Reclamation, the Circuit clarified that
“[a]lthough U.S. Bancorp Mortgage Co. addresses appellate court vacatur, its
13 Id. at 29.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 6 of 8
rationale also governs the district court’s decision whether to vacate its own
judgment pursuant to Fed. R. Civ. P. 60(b).”14 In embracing the overriding
principles of Bancorp, the Tenth Circuit held:
Whether any opinion should be vacated on the basis ofmootness is an equitable question. Following thisconcept, we have held that when the party seekingrelief is the cause of the mootness, vacatur will not be
granted. We have also held when appellants voluntarilycontribute to the cause of mootness, vacatur will be
This Court is bound by the Tenth Circuit’s precedent. This Court could only
grant Central’s motion to vacate if Central showed exceptional circumstances
justifying vacatur, and Central has not argued that such circumstances exist.
Further, the Court’s own review of the record does not show exceptional
circumstances meriting vacatur.
This Court also agrees with the Tenth Circuit’s point that an
“additional reason for denying vacutur motions is to make clear to the public
14 601 F.3d 1096, 1129 n.20 (10th Cir. 2010) (citing Valero Terrestrial Corp. v.
Paige, 211 F.3d 112, 118, 121 (4th Cir. 2000)). The Court notes that all requests tovacate inherently rely on Rule 60(b). Summit Financial Resources, L.P. v. Kathy’s
General Store, Inc., No. 08–2145–CM, 2011 WL 3666607 at *1 (D. Kan. Aug. 22,2011).
15 Rio Grande Silvery Minnow v. Keys, 355 F.3d 1215, 1220 (10th Cir. 2004)
(citations omitted). See also Amoco Oil Co. v. U.S. E.P.A., 231 F.3d 694 (10th Cir.
2000) (collecting cases); Summit Financial, 2011 WL 3666607 at *1 (citing Bancorpfor the proposition that “[t]he standard for vacatur on the basis of a settlement is ashowing of exceptional circumstances”).
Case 12-40685 Doc# 330 Filed 10/17/13 Page 7 of 8
that nothing improper motivated the [district court’s] discretion decision.”16 In
addition, because the legal issues that are the subject of the order for which
Central seeks vacatur are highly likely to recur in this Bankruptcy Court
with different litigants, this Court’s factual and legal analysis “may provide a
baseline to inform the debate”17 in further similar proceedings.
Because Central has voluntarily contributed to the cause of the
mootness and is unable to show exceptional circumstances, the motion to
vacate18 must be denied.
It is so ordered.
# # #
16 Id.. at 1131.
18 Doc. 316.
Case 12-40685 Doc# 330 Filed 10/17/13 Page 8 of 8
- Category: Judge Karlin
- Published on 05 November 2013
- Written by Judge Karlin
- Hits: 127
In Re Knowles, 13-40602 (Bankr. D. Kan. Nov. 4, 2013) Doc. # 47
SIGNED this 4th day of November, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
Daniel Lee Knowles Case No. 13-40602
Tiffany Ann Knowles, Chapter 13
Memorandum Opinion and Order Overruling in Part and Sustaining in
Part the Trustee’s Objection to Plan Confirmation
Debtors seek confirmation of a Chapter 13 plan1 that treats debts owed to two
unsecured creditors—a student loan creditor and the Kansas Department of Labor
(KDOL)—dramatically more favorably than the debts they owe to their many other
general unsecured creditors. Debtors’ plan also calls for them to retain and fully pay
for a third, non-exempt vehicle for their two-person household, while also paying for
the two vehicles they elected to exempt. The chapter 13 trustee (the Trustee) objects
to all of these proposals.
1 Doc. 2.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 1 of 28
The Court overrules in part and sustains in part the Trustee’s objection to plan
confirmation. The Code, since being amended in 2005, only prohibits above-median
income debtors from voluntarily paying nondischargeable student loan debt using
discretionary income outside of a plan when all projected disposable income, as defined
by the Code, is paid into a plan when unfair discrimination results from such
treatment. The treatment of the student loan creditor in this case does not create
unfair discrimination under 11 U.S.C. § 1322(b)(1) if Debtors are not accelerating the
repayment of the student loan. Debtors’ treatment of the KDOL claim, however, does
unfairly discriminate against similarly situated creditors, and the Trustee’s objection
to this part of the plan is therefore sustained. The Trustee’s objection to Debtors’
planned retention of a third vehicle is also sustained, as Debtors did not carry their
burden to show that this plan provision was filed in good faith under 11 U.S.C. §
Because of these rulings, Debtors’ plan cannot be confirmed. Debtors must file
an amended plan consistent with this decision within 21 days of the entry of this
Memorandum Opinion if they wish to remain in a Chapter 13 proceeding.
I. Factual and Procedural History
The parties stipulate to the following facts,2 which are supplemented by record
2 Doc. 28 (Stipulations of Fact). On July 24, 2013, I set a deadline for the parties tostipulate to all facts they could stipulate to by August 14 (rejecting Debtors’ counsel’spreferred procedure that required the Trustee to file a summary judgment motion). OnAugust 14, the Trustee filed a Motion to Extend the deadline to file stipulations (Doc. 27),
noting that while the Trustee had tried, in good faith, to meet the August 14 deadline bysending proposed stipulations to Debtors’ counsel 6 days earlier, and soliciting similarstipulations from him, Debtors’ counsel had refused to stipulate to the Trustee’s facts or to
Case 13-40602 Doc# 47 Filed 11/04/13 Page 2 of 28
evidence. Debtors filed this Chapter 13 bankruptcy in May 2013 and scheduled a total
of $65,075 in unsecured claims, $40,598 in secured clams, and $268 in priority
unsecured claims. While Debtors’ plan will pay no dividend to general unsecured
creditors, it will pay for three vehicles, with the Trustee’s discount rate of interest, as
Creditor Capital One – collateral 2010 Nissan, with debt of $11,100 andvalue of $11,000, proposing to pay the full debt at $208.20 a month;
Creditor Chase Auto – collateral 2006 Ford F-150, with debt of $15,698
and value of $10,866, proposing to pay the full debt at $294.45 a monthbecause Chase Auto is a “910” creditor; and
Creditor HD Credit – collateral 2011 motorcycle, with debt of $13,800 andvalue of $11,375, proposing to pay full debt at $258.85 a month becauseHD Credit is a “910” creditor.
The plan also provides full payment of the anticipated $4,793 KDOL claim as a special
class.3 Debtors’ schedules list student loan debt owed to Direct Loan Servicing System
offer any of his own. Counsel’s main basis for refusing to stipulate, originally, was thatmost of the facts the Trustee sought to stipulate could be found if I simply combed throughthe pleadings on file for the information. I conducted a status conference on August 15,2013, and confirmed that while Debtors’ counsel still disagreed with my order to stipulateto the relevant facts (and if the parties disputed any material facts, we’d have anevidentiary hearing solely on the limited disputed facts), he did not actually dispute any ofthe Trustee’s offered facts, and did not need any additional facts of his own. As a result,
Debtors’ counsel ultimately agreed to sign the Stipulation of Facts that the Trustee hadoriginally presented to him. This is fairly summarized in an Order I signed on August 16,2013 (Doc. 29, noting “The parties have indicated agreement to the facts circulated.”). At notime since (other than to present additional evidence about retention of the third, nonexempt
vehicle, as the parties agreed) have Debtors indicated a desire to present additionalevidence.
3 Although KDOL has not yet filed a claim (the government bar date doesn’t expireuntil November 13, 2013), this opinion will refer to its “claim” as opposed to its “debt” forconsistency.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 3 of 28
for $33,975 and to U.S. Department of Education for $1028.4 The plan provides to pay
those student loans pro rata with other general unsecured creditors, but Debtors do not
expect that any portion of the payments they promise to make to the Trustee will ever
reach any unsecured creditor except for KDOL.
Debtors’ plan payment is $980 per month. Debtors are above-median income and
thus their applicable commitment period is 60 months.5 Debtors’ budget reflects
$1051.25 in monthly net income, although Mr. Knowles admitted at trial that his
Schedule J overstates his true motorcycle insurance costs by close to $100 each month.6
Debtors’ monthly expenses include, but are not limited to: $300 for transportation (not
including car payments); $250 for auto insurance; $56.56 for motorcycle insurance; $75
for auto tags and taxes; and $500 for “student loan repayments to Fed Loan, UNL.”
Over the life of Debtors’ plan, they will thus spend $18,000 for transportation (not
including the note payments, which total approximately $42,000), $15,000 for auto
insurance, $3393.60 for motorcycle insurance, $4500 for auto tags and taxes, and
$30,000 for student loan debt repayment.
The Trustee generally objects to confirmation of Debtors’ plan on the basis that
4 Of these two student loan creditors, only the U.S. Department of Education hasfiled a claim, for $35,058.61 (Claim number 13).
5 See 11 U.S.C. § 1325(b)(4) (requiring payments of projected disposable income fornot less than five years if the current monthly income of the debtors is above the medianfamily income for that state).
6 At the time of filing, Debtors were paying $150/mo for motorcycle insurance. Theyhave since switched insurers and now pay $56.56/month, but have not amended theirSchedule J to reflect this savings.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 4 of 28
it does not comply with 11 U.S.C. § 1322(b)(1) because the plan unfairly discriminates
against classes within the plan. The Trustee then stated three bases for his objection
to confirmation: (1) Debtors’ direct payment of $500 per month for student loan debt
results in unfair discrimination against other unsecured creditors; (2) there is no legal
basis for separate classification of the KDOL claim as a special class; and (3) Debtors
are unnecessarily retaining the 2011 motorcycle when they are already paying to
retain two other vehicles.7 Debtors’ response, filed by their retained counsel, contains
only one sentence: “COME NOW debtors and object to the motion to dismiss and show
that the Trustee is dead wrong in the position he has taken and debtors will soon show
I have fully considered the parties’ briefs, the Stipulation of Facts, and the
evidence received at trial on the issue of the motorcycle retention.9 As a preliminary
7 Doc. 18.
8 Doc. 21. This response is wholly unacceptable. It does not provide the Trustee orme with a single factual or legal basis for Debtors’ position, and, in fact, does all parties adisservice by delaying the proceedings. The response shows a lack of preparation andindicates that there was no inquiry into, or true analysis of, the factual and legal elementsof the issues by Debtors’ counsel. Furthermore, Debtors’ counsel’s refusal to enter into goodfaith stipulations of fact by the August 14 deadline, until I had to intervene and conduct ahearing, is similarly unprofessional and cannot be tolerated. Counsel for Debtors is warnedto not file any similar pleadings in this Court, or to again refuse to cooperate when orderedto provide a Court with reasonable stipulated facts, without risk of a referral to the KansasBoard for Discipline of Attorneys for violations of the Kansas Rules of Professional Conduct.
Counsel can (and must) be both professional and courteous while also protecting his clients’rights. See In the Matter of the Kansas Bar Association’s Pillars of Professionalism
Memorandum and Order, adopted by both the District and Bankruptcy Courts in thisDistrict on October 19, 2012.
9 Doc. 31 (Brief in Support of the Chapter 13 Trustee’s Objection to Confirmation);
Doc. 32 (Debtors’ Response); Doc. 33 (Chapter 13 Trustee’s Reply Brief).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 5 of 28
matter, I find this Court has jurisdiction to decide this matter,10 as it is a core
Debtors, as the proponents of the plan, bear the burden of proof to show that
their plan is confirmable.12
Unfair Discrimination — Payment of Student Loans and the
Kansas Department of Labor as Special Classes
Section 1322(b)(1) of Title 11 permits a chapter 13 plan to “designate a class or
classes of unsecured claims;” the plan, however, “may not discriminate unfairly against
any class so designated.” Generally stated, § 1322(b)(1) permits the designation of
separate classes of unsecured claims and different treatment of the separate classes,
as long as the classification does not cause “unfair” discrimination.13 The Court has
10 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)
and (b) and by operation of a Standing Order dated August 1, 1984, effective July 10, 1984,
referenced in D. Kan. Rule 83.8.5, wherein the District Court for the District of Kansas
referred all cases and proceedings in, under, or related to Title 11 to the Districts’bankruptcy judges.
11 See 28 U.S.C. § 157(b)(2)(A) and (L) (stating that “matters concerning theadministration of the estate” and the “confirmation of plans” are core proceedings that abankruptcy judge has jurisdiction to hear and determine).
12 See Alexander v. Hardeman (In re Alexander), 363 B.R. 917, 921–22 (10th Cir.
BAP 2007) (generally assigning burden of proof for confirmation to plan proponent).
13 Although not clear, Debtors may be arguing that § 1322(b)(1) does not apply totheir preferred treatment of the student loan creditors via direct payment, because the planitself does not directly classify the student loan creditor separately. I find that the directpayment to the student loan creditor outside of Debtors’ plan is the equivalent of a separateclassification for purposes of § 1322(b)(1). See, e.g., In re Sharp, 415 B.R. 803, 807 (Bankr.
D. Colo. 2009) (stating that “classifications are not always explicit” and that “[c]ourts haverecognized that a payment to a creditor ‘outside the plan’ can amount to an implicitclassification, even though not specifically referenced in the plan”); In re Renteria, Case No.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 6 of 28
wide discretion in determining whether proposed discrimination is unfair
The Bankruptcy Code does not define when a plan classification causes unfair
discrimination, and courts have struggled to define the limits of unfair discrimination
under § 1322(b)(1). The D.C. Circuit, the first Circuit to address unfair discrimination
under § 1322(b)(1), simply stated:
[A]n inquiry into fairness plainly involves more than the rationality of thedebtor’s classifications or some minimum amount creditors must receive.
What constitutes fair discrimination will vary from case to case, and wecannot offer a generally applicable definition. The court must examine theamounts proposed for each class in light of the debtor’s reasons forclassification, and exercise sound discretion.15
Other appellate courts, however, have attempted to offer a “generally applicable
definition” through the use of multi-factor tests.
For example, the First Circuit BAP, in Bentley v. Boyajian (In re Bentley), 16
directed courts to look to “the principles and structure of Chapter 13 itself” for “the
baseline against which to evaluate discriminatory provisions for fairness.”17
11-25510 MER, 2012 WL 1439104, at *1 (Bankr. D. Colo. Apr. 26, 2012) (stating that“payment to . . . a student loan creditor, ‘outside the plan,’ i.e., as a recurring expense notcovered by the plan provisions or paid through the Chapter 13 trustee, can constitute animplicit classification”).
14 Labib-Kiyarash v. McDonald (In re Labib-Kiyarash), 271 B.R. 189, 196 (9th Cir.
15 Barnes v. Whelan (In re Barnes), 689 F.2d 193, 201–02 (D.C. Cir. 1982).
16 266 B.R. 229 (1st Cir. BAP 2001).
17 Id. at 240.
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Specifically, the Bentley court looked at (1) equality of distribution; (2) nonpriority of
student loans; (3) mandatory versus optional contributions (a comparison of what the
dischargeable unsecured creditors would receive in a pro rata distribution of the
mandatory contribution under chapter 13); and (4) the debtor’s fresh start.18 Under this
When a plan prescribes different treatment for two classes but, despitethe differences, offers to each class benefits and burdens that are
equivalent to those it would receive at the [statutory] baseline, then thediscrimination is fair. On the other hand, when the discrimination alters
the allocation of benefits and burdens to the detriment of one class, the
discrimination is unfair and prohibited.19
The Seventh Circuit also appears to favor the Bentley approach. In In re Crawford, 20
the Seventh Circuit cited the Bentley opinion and then stated:
[T]his is one of those areas of the law in which it is not possible to dobetter than to instruct the first-line decision maker, the bankruptcyjudge, to seek a result that is reasonable in light of the purposes of therelevant law, which in this case is Chapter 13 of the Bankruptcy Code;
and to uphold his determination unless it is unreasonable (an abuse ofdiscretion).21
The Eighth Circuit and Ninth Circuit BAP use a different four-part test, referred
to as the Leser/Wolff test,22 to determine whether separate classification results in
18 Id. at 240–42.
19 Id. at 240.
20 324 F.3d 539 (7th Cir. 2003).
21 Id. at 542.
22 Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991); AMFAC Distribution
Corp. v. Wolff (In re Wolff), 22 B.R. 510 (9th Cir. BAP 1982).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 8 of 28
unfair discrimination. Under this test, the court is directed to ask: “(1) whether the
discrimination has a reasonable basis; (2) whether the debtor can carry out a plan
without the discrimination; (3) whether the discrimination is proposed in good faith;
and (4) whether the degree of discrimination is directly related to the basis or rationale
for the discrimination.”23
The Tenth Circuit has not considered this issue,24 and bankruptcy courts in this
Circuit have used both the Bentley test25 and the Leser/Wolff test.26 Although it seems
that the Leser/Wolff test may be followed by a majority of courts,27 this Court believes
that the Bentley test more accurately reflects the statutory scheme established by
23 In re Leser, 939 F.2d at 672; In re Wolff, 22 B.R. at 512. More recent cases from
the Eighth and Ninth Circuit BAP applying the Leser/Wolff tests are Groves v. LaBarge (In
re Groves), 39 F.3d 212 (8th Cir. 1994); Copeland v. Fink (In re Copeland), 483 B.R. 534 (8thCir. BAP 2012); In re Labib-Kiyarash, 271 B.R. at 194–96.
24 Even if the Tenth Circuit had specified the use of a particular test, the existingmulti-factor tests are not without criticism. Some courts have noted that the multi-factor
tests that have been developed to define unfair discrimination are not entirely satisfactorybecause they are essentially totality of circumstances tests, “running the risk of beingdepicted as an ad hoc, potentially purely subjective determination.” See, e.g., In re Sharp,
415 B.R. 803, 807–08 (Bankr. D. Colo. 2009) (discussing criticism of tests for determiningunfair discrimination). And as noted by one commentator, “numerous authorities havesuggested that the multi-factor tests boil down to nothing more than a test ofreasonableness.” Stephen L. Sepinuck, Rethinking Unfair Discrimination in Chapter 13, 74
Am. Bankr. L.J. 341, 360 n.113 (2000).
25 See, e.g., In re Stull, 489 B.R. 217, 220 (Bankr. D. Kan. 2013) (applying Bentleytest); In re Mason, 300 B.R. 379, 387 (Bankr. D. Kan. 2003) (concluding that the Bentleytest “is most loyal to the objective goals and motivations of Chapter 13 and the BankruptcyCode”).
26 See, e.g., In re Anderson, 173 B.R. 226, 229 (Bankr. D. Colo. 1993) (applying four-
part Leser test); In re Perkins, 55 B.R. 422, 425–26 (Bankr. D. Okla. 1985) (same).
27 See In re Towler, 493 B.R. 239, 244 (Bankr. D. Colo. 2013) (calling the Leser/Wolff
test the “most prominent” of the multi-factor tests for unfair discrimination under §
Case 13-40602 Doc# 47 Filed 11/04/13 Page 9 of 28
chapter 13 and the spirit of the Code. As a result, I will use it to help determine
whether Debtors’ plan results in unfair discrimination.
Here, Debtors have discriminated in favor of two unsecured creditors—a student
loan creditor and the KDOL. With regard to the student loan creditor, Debtors propose
pro rata distribution along with other unsecured creditors (which admittedly is
predicted to result in the Trustee paying zero dollars to any unsecured creditor), plus
an additional $500 per month Debtors will pay directly to the student loan creditor out
of the income not devoted to the plan payment. With regard to Creditor KDOL, Debtors
propose a special class to fully pay the anticipated $4,793 claim, which arose from
overpayment of unemployment compensation to one of the Debtors.
The Trustee argues that Debtors’ treatment of these creditors unfairly
discriminates against other unsecured creditors, because the student loan creditor
would be paid almost in full and the KDOL claim would be paid in full, while the
remaining unsecured creditors would receive nothing. And while the Trustee
acknowledges that Debtors’ student loan debt is nondischargeable, he argues that this
fact, alone, is insufficient to justify separate treatment. He argues that if payments
were instead shared pro rata among all unsecured creditors, the dividend to all
unsecured creditors would be 51% (rather than zero, as currently proposed). Finally,
the Trustee argues that pro rata payment to the student loan creditor in addition to
direct payment is doubly unfair because if pro rata distribution to unsecured creditors
would occur, perhaps due to non-filing of claims, earlier payment of secured claims, an
inheritance, or the like, the student loan creditor would receive dual favorable
Case 13-40602 Doc# 47 Filed 11/04/13 Page 10 of 28
With regard to the treatment of the student loan creditor, Debtors respond that
the superior treatment of the student loan creditor is not unfair because that debt is
nondischargeable. They argue that paying nearly all of the debt during the plan would
enhance their ability to obtain a fresh start after they exit bankruptcy,28 because if
they are prevented from paying this debt for 60 months, they will face not only the
$35,000 presently owed, but five years of additional nondischargeable interest when
they finally exit bankruptcy with their discharge.
With regard to the treatment of the KDOL claim, Debtors argue that Kansas law
allows the Department of Labor to reduce future unemployment payments by the
amount of a past overpayment under K.S.A. § 44-719(d)(1), and that, if Debtors are laid
off and if they apply for unemployment in the future, future benefits might be denied
based on the outstanding overpayment. They further argue that if this happened
during the life of this plan, there might be insufficient income to make plan payments.
Using the Bentley court’s test, I consider the following factors to aid in the
28 The plan will result in approximately 85% of the student loan being paid in fiveyears when many student loans are paid out over a much longer period of time. If the actualpromissory note(s) for these loans called for payment, for example, of only $300 per month,
it might not be in good faith (or fair) to in essence pre-pay the student loan at the expenseof other unsecured creditors. See In re Freeman, Case No. 06-10651-WHD, 2006 WL
6589023, at *2, n.1 (Bankr. N.D. Ga. Dec. 22, 2006) (curing and maintaining student loandebt does not unfairly discriminate; however, payment on an accelerated basis mayconstitute unfair discrimination); see also In re Brown, __ B.R. __, 2013 WL 4806392, at *11
(Bankr. S.D. Ga. 2013) (noting that the bankruptcy court would continue to approve plansthat provide for regular monthly payments to a creditor equal to that required pre-petitionunder the loan documents, with the balance at the end of the five-year period to be exceptedfrom discharge under § 1328(a)(1)). This precise objection is not before me with this plan,
and no evidence was presented as to the amount of the contractually agreed payment.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 11 of 28
determination whether Debtors’ proposed treatment of these “preferred” creditors
creates unfair discrimination: (1) equality of distribution; (2) nonpriority of student
loans or the KDOL debt; (3) mandatory versus optional contributions (a comparison of
what the unsecured creditors holding dischargeable claims would receive in a pro rata
distribution of the mandatory contribution under chapter 13); and (4) the Debtors’
Regarding the equality of distribution, the Bentley court noted that the Code’s
focus is to treat all equally situated creditors equally, unless specifically stated
otherwise in the Bankruptcy Code. Debtors do not claim that the Code has accorded
either “preferred” unsecured creditor priority status under 11 U.S.C. § 507(a).30 As a
result, these “preferred” unsecured creditors would normally share in pro rata
distributions with the other approximately $25,000 in unsecured claims, receiving 51%
of their claims instead of 85-100%.31 Debtors must thus justify this widely differing
treatment using some alternate argument.32
Admittedly, student loan debts are nondischargeable, but, as stated in Bentley,
29 In re Bentley, 266 B.R. at 240–42.
30 I note that while the plan expressly states they have no priority creditors, Debtorshave since stipulated that their schedules showed $268 in priority claims. I can also takejudicial notice that the IRS has filed a priority claim for $1,383, and that Debtors have notobjected to that claim.
31 Doc. 28, Stipulation No. 11.
32 See Bentley, 266 B.R. at 240 (“As a general rule, then, fairness in Chapter 13requires equality of distribution among nonpriority unsecured creditors, and the burden onjustification is on those who propose plans to the contrary.”).
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“nondischargeability is not, and does not entail, priority as to any distribution in or
through bankruptcy; it merely permits the holder to continue to enforce the debt after
bankruptcy. . . . Accordingly, as far as the Code is concerned, nothing in the nature of
the claims at issue here warrants or justifies treating the student loans more favorably
than the others.”33 Chapter 13 expressly excepts many debts from discharge, and thus
the Code does not necessarily contemplate that a debtor will emerge from Chapter 13
entirely free of all prepetition debt. The “choice here is not between a fresh start and
no fresh start, but between fresh starts of different extent.”34
That said, however, I agree with one commentator who has opined that the real
reason educational loans are nondischargeable has little to do with the debtor at all;
they are more likely nondischargeable because Congress wishes to protect the
government’s fiscal health as a guarantor (or lender) of these loans, and because “if
these debts were dischargeable, the availability of educational loans might drastically
decline.”35 So we cannot forget that Congress, while not according student loans
priority status, most certainly gave them favored status.36 This is important when
33 Id. at 241; see also Towler, 493 B.R. at 246 n.5 (collecting cases stating thatnondischargeability of debt is not a sufficient basis, by itself, to justify more favorabletreatment of the debt).
34 Bentley, 266 B.R. at 242 n.25.
35 Sepinuck, supra note 24, at 382.
36 Id. at 383. The Sepinuck article also makes the interesting point that Congressmay have elected to not grant priority status to student loans since the Code requirespriority claims to be paid in full during a three to five year plan, which many debtors couldnot afford to do. Priority treatment would actually foreclose many debtors from seekingChapter 13 relief. Id. at 385–86.
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trying to construe how Congress wished its “fair discrimination” language to be
I also acknowledge that the nondischargeability rule effectively forbids student
loan claimants from pursuing collection from a debtor’s post discharge earnings for
upwards of 5 years. As a result, if the nondiscrimination rule does not allow favorable
treatment of student loan claims during the life of the plan, those claimants may, in
fact, be worse off than if the debtor had liquidated under Chapter 7, since they may not
pursue collection for a long time. And the result for debtors is even worse—owing more
on their student loans after completion of their plan than before filing for Chapter 13
relief because of accumulation of equally nondischargeable interest that will accrue.37
Further, since it is clear that Congress intended for the means test to result in more
debtors filing chapter 13 petitions rather than chapter 7 petitions, a decision that
encourages a Chapter 7 filing (an outcome that could occur by denying Debtors the
opportunity to maintain their student loan payment during the life of their mandatory
5-year plan) does not further the purposes or spirit of the Code.
Regarding distributions, Debtors show a negative projected disposable income
on their B22C means test, so there is no projected disposable income to devote to
37 Id. at 387-88; In re Delbecq, 368 B.R. 754, 759 (Bankr. S.D. Ind. 2007) (concludingthat paying credit card debt instead of making student loan payments was not a reasonablealternative for a debtor as she would end up owing substantially more in nondischargeablestudent loans than she did upon the date of filing).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 14 of 28
payment of unsecured creditors.38 It is only Debtors’ excess discretionary income that
is devoted to the extra $500 per month payment of student loans. As a result, this
prong of the Bentley test—the comparison of what the unsecured creditors would
receive in a pro rata distribution of the mandatory contribution—is satisfied: Bentley
notes that, “after student loan claims have shared on a pro rata basis with other
general unsecured claims in the distribution funded by the Chapter 13 plan,” the
student loans may be “paid by debtors out of assets that they need not contribute to the
plan.”39 This is exactly what Debtors have proposed here—it is Debtors’ discretionary
income, above their Code-computed projected disposable income, that they are
voluntarily contributing to payment of student loans.40 As Judge Nugent noted in In
38 Obviously, because below I herein deny confirmation of a plan that retains a thirdvehicle (as discussed below), the means test would now show at least an additional $229.52(the amount deducted for the motorcycle), thus showing a positive $198 as monthlydisposable income potentially payable to unsecured creditors. As Debtors admit in theirbrief, the Supreme Court’s recent decision in Ransom v. FIA Card Servs., N.A., __ U.S. __,
131 S. Ct. 716, 722 (2011) would not allow them to deduct the costs of the associated loanfor a vehicle they cannot keep. Because this would be known with certainty at the time ofplan confirmation, this decision is without prejudice to any objection the Trustee or otherparties in interest might make if Debtors opt to amend their plan in lieu of dismissal.
39 Bentley, 266 B.R. at 243.
40 For the plan at issue here, the Trustee did not dispute Debtors’ calculation ofprojected disposable income. For this reason, the Trustee’s argument based on Hamilton v.
Lanning (In re Lanning), 560 U.S. 505, 130 S. Ct. 2464 (2010), is misplaced. The SupremeCourt in Lanning held that “when a bankruptcy court calculates a debtor’s projecteddisposable income, the court may account for changes in the debtor’s income or expensesthat are known or virtually certain at the time of confirmation.” Id. at 2478. The Trustee
cites this case and then argues that the Supreme Court requires chapter 13 debtors tosatisfy a forward-looking approach to income (rather than a mechanical approach), and thatthis somehow requires debtors to make equal payments to all similarly situated creditors.
But the Lanning opinion does not reach this far—in fact, although the opinion gives lowercourts permission to consider changes in income or expenses when computing projecteddisposable income, it says nothing about the treatment of discretionary income above that
Case 13-40602 Doc# 47 Filed 11/04/13 Page 15 of 28
re Stull, after assessment of the Bentley test in that case: “Because student loans are
not accorded statutory priority, anything they receive over what they would take in a
pro rata distribution without the discrimination, should come from assets not required
to be contributed to the plan and thus not detract from the unsecured creditors’ take.”41
Application of this factor to the KDOL claim, however, is less clear. As a result
of Debtors’ special treatment of this claim, other unsecured creditors essentially bear
the burden of paying this similarly situated dischargeable debt, although the difference
in pro rata distribution would be admittedly small. And while Debtors argue that they
must separately classify this debt because they may need unemployment compensation
in the future, and they presume that if they do not repay this claim in full they may
be denied future benefits, there are no facts in evidence to support this argument.
There is nothing in the Stipulation of Facts that provides evidence about the likelihood
either Debtor might be laid off during the life of the plan, or, if they were, whether they
could defer payment of other expenses until re-employment without the need for
unemployment benefits. In addition, Debtors fail to acknowledge that the very statute
upon which they rely for this argument—K.S.A. § 44-719(d)(1)—also allows the
secretary of the agency to totally waive repayment under certain conditions, making
the certainty they would face consequences for nonpayment even more speculative.
Debtors are now currently gainfully employed, qualifying as above-median income
number, and certainly does not define unfair discrimination under § 1322(b)(1).
41 489 B.R. 217, 220 (Bankr. D. Kan. 2013).
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debtors. Accordingly, any potential future impact on Debtors’ fresh start is pure
speculation. For that reason, I have no evidence upon which I can find this
discrimination is “fair.”42
Finally, under the Bentley test, I consider Debtors’ fresh start. Admittedly, as
the Bentley court notes, “affording debtors a fresh start is one of the fundamental
purposes of Chapter 13 and of the Bankruptcy Code in general.”43 But the Code places
many limitations on this fresh start, including its express exclusion of most student
loans from discharge under § 523(a)(8). And fair distribution to creditors is equally an
important goal of the Code as is a fresh start. The Code contemplates that student
loans will remain after debtors receive their discharge. Debtors will presumably be
better situated to repay those student loans, having received a discharge of all their
other unsecured debt. Yet, as Bentley notes, nothing in the Code prevents debtors from
facing this debt earlier, using their discretionary income to pay student loan debt
throughout the life of the plan.
Based on the consideration of the Bentley factors, and a weighing of the burdens
and benefits established by the Code as a baseline, this Court concludes that the direct
payment to the student loan creditor of ongoing contractual payments does not
constitute unfair discrimination under § 1322(b)(1). Although student loans are not
42 Unlike the student loan claim, where the Trustee has admitted its
nondischargeability, there is no similar admission regarding the KDOL debt, and Debtorshave not claimed the KDOL debt is nondischargeable.
43 266 B.R. at 242.
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accorded priority by the Code, Debtors are contributing this excess amount to the
student loan debt only from funds not required by the Code to be committed to the
plan. As stated by Bentley, “[w]hen a plan prescribes different treatment for two
classes but, despite the differences, offers to each class benefits and burdens that are
equivalent to those it would receive at the baseline, then the discrimination is fair.”44
If payment of $500 per month to student loan creditors is what is required by Debtors’
contract, then the treatment of the student loan creditors in this case is no different
than that contemplated by the Code, and Debtors do not unfairly discriminate by
devoting their discretionary income to repayment of those loans.
For these reasons, the facts of this case are distinguishable from the case upon
which the Trustee relies, In re Kubeczko. 45 The bankruptcy court in Kubeczko analyzed
whether a below-median income debtor could pay monthly payments to student loan
creditors as a long-term debt under § 1322(b)(5), thereby causing a significant decrease
in plan payments to other unsecured creditors.46 The Kubeczko court concluded that the
proposed treatment resulted in unfair discrimination under § 1322(b)(1).47 But the
difference from the facts at hand is critical. The debtor in Kubeczko earned below
median income and thus, pursuant to the Bankruptcy Code, had no disposable income.
Here, Debtors are above-median, and propose to commit their discretionary income to
44 Id. at 240.
45 Case No. 12-13766 HRT, 2012 WL 2685115 (Bankr. D. Colo. July 6, 2012).
46 Id. at *1–2.
47 Id. at *5.
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their student loan payments. Utilizing the baseline test, this is permissible, because
the “principles and structure of chapter 13 itself” do not indicate the procedure is
For similar reasons, the Court rejects the Trustee’s argument that payment to
the student loan creditor via both direct payment and pro rata through the plan is
unfair. The Trustee contends that if pro rata distribution to unsecured creditors occurs
under the plan, the student loan creditor will receive dual favorable treatment. But
grouping of unsecured creditors for equal plan payment is exactly what the Code
contemplates, and I cannot determine that equal distribution of any plan payments,
as directly required by the Code, is unfair discrimination.49 In this case,
“Debtors’ student loan and non-student loan creditors are receiving
48 Bentley, 266 B.R. at 240. The Trustee argues that it is absurd for Congress topermit a more wealthy, above-median debtor to pay a student loan through the plan butthen deny the same benefit to a below-median debtor. While I express no opinion on howthis case would be decided if Debtors were below-median, I do note that the entire exercise
of determining unfair discrimination (which is not permitted) versus discrimination (whichis permitted) necessarily requires a weighing of factors. And although from where I sit theresult of permitting wealthier debtors (who will presumably have more income afterbankruptcy) to pay student loans during bankruptcy but to deny that same benefit to poorerdebtors may not seem well-guided, Congress did not ask for my advice when it wrote thecurrent version of the Code, and that current version appears to require this result. Sowhile the result may be misguided, I cannot find the result is necessarily absurd. First, thisinterpretation does still allow some (wealthier) debtors a “fresher” start, a fresh start beinga stated goal of the Code. Second, an interpretation that repays government-backed debtmore quickly also furthers the government’s interest in replenishing the Treasury andpotentially having more funds available to make more student loans.
49 See, e.g., In re Sharp, 415 B.R. 803, 813 (Bankr. D. Colo. 2009) (citing Bentley and
concluding that the debtors’ pro rata payment to student loan creditors in addition to amonthly discretionary payment to student loan creditors was not unfair discriminationbecause equal distribution of plan payments, by definition, did not discriminate). I also notethat no party expects this double recovery to actual occur, because the plan anticipates nopayments to the student loan creditors under the plan.
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exactly what the Code requires Debtors to pay them—a pro rata paymentof PDI [projected disposable income]. The fact that the student loancreditors are also receiving a discretionary payment from Debtors doesnot entitle the remaining unsecured creditors to additional moneys, nor‘dis-entitle’ student loan creditors from receiving a pro rata payment.”50
The Court finds that the treatment of the debt owed KDOL as a special class,
however, is unfairly discriminatory. Debtors do not assert that the KDOL debt
commands either priority status or that it is a nondischargeable debt. As a result, and
in contrast to the analysis of the student loan debt, the proposed treatment of the
KDOL debt does unfairly discriminate against similarly situated creditors. Debtors
presented no evidence whatsoever on this issue, and thus failed to demonstrate it was
more likely than not that failure to pay 100% of that debt would impair their fresh
start. Accordingly, the Court finds that the proposed discrimination merely “alters the
allocation of benefits and burdens to the detriment of one class,”51 and the
discrimination is, therefore, unfair under § 1322(b)(1).
B. Good Faith — Retention of Third Vehicle
The Trustee also challenges Debtors’ plan to retain and pay for three vehicles
through their plan. Debtors propose to retain and pay for a 2010 Nissan Sentra, a 2006
Ford F-150 pickup, and a 2011 Harley Davidson motorcycle. Debtors claimed the
Nissan and Ford as exempt, and do not dispute that the Harley motorcycle is not
exempt. Debtors’ plan will also pay more for both the Ford and the Harley motorcycle
51 Bentley, 266 B.R. at 240.
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than they are worth, because they were both purchased within 910 days of filing
Section 1325(a)(3) requires that a chapter 13 plan be “proposed in good faith and
not by any means forbidden by law.” Whether a plan has been proposed in good faith
is a question of fact based on the totality of the circumstances.53 In Flygare v.
Boulden, 54 the Tenth Circuit expressed the following non-exclusive factors for
determining a debtor’s good faith:
(1) the amount of the proposed payments and the amount of the debtor’ssurplus; (2) the debtor’s employment history, ability to earn andlikelihood of future increases in income; (3) the probable or expectedduration of the plan; (4) the accuracy of the plan’s statements of thedebts, expenses and percentage repayment of unsecured debt andwhether any inaccuracies are an attempt to mislead the court; (5) theextent of preferential treatment between classes of creditors; (6) theextent to which secured claims are modified; (7) the type of debt soughtto be discharged and whether any such debt is non-dischargeable inChapter 7; (8) the existence of special circumstances such as inordinatemedical expenses; (9) the frequency with which the debtor has soughtrelief under the Bankruptcy Reform Act; (10) the motivation and sincerityof the debtor in seeking Chapter 13 relief; and (11) the burden which theplan’s administration would place upon the trustee.55
The continued viability of the Flygare factors for all cases, however, has been
questioned by a subsequent Tenth Circuit case as a result of the 2005 amendments to
52 See Doc. 28, Stipulation No. 2 and 11 U.S.C. § 1325(a) (requiring full payment ofvehicles purchased within 910 days of bankruptcy, with interest, in chapter 13 plans).
53 Robinson v. Tenantry (In re Robinson), 87 F.2d 665, 668 (10th Cir. 1993).
54 709 F.2d 1344 (10th Cir. 1993).
55 Id. at 1347–48 (quoting United States v. Estus (In re Estus), 695 F.2d 311, 316–17
(8th Cir. 1982)).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 21 of 28
the Bankruptcy Code.
In Anderson v. Cranmer (In re Cranmer), 56 the Tenth Circuit noted that the
Bankruptcy Code has been amended since Flygare was decided to include § 1325(b),
and that “[s]ection 1325(b)’s ‘ability to pay’ criteria subsumes most” of the Flygare
factors such that the “good faith inquiry now has a more narrow focus.”57 Regardless,
the Tenth Circuit stated in Cranmer that bankruptcy courts still need to consider
“factors such as whether the debtor has stated his debts and expenses accurately;
whether he has made any fraudulent misrepresentation to mislead the bankruptcy
court; or whether he has unfairly manipulated the Bankruptcy Code.”58
The Trustee argues that Debtors’ retention of a third vehicle is unreasonable
and unnecessary. He notes that by claiming two other functioning vehicles as exempt,
Debtors have essentially admitted that it is the Nissan and Ford that they regularly
use for transportation to and from work.59 The Trustee contends, then, that retaining
and paying for a third vehicle (the motorcycle) for a two-adult household must
necessarily be a luxury expense, and that diverting income from unsecured creditors
so they can retain a spare vehicle would create an absurd result. The Trustee argues
that retention of the motorcycle, along with associated increased insurance, tax, and
56 697 F.3d 1314 (10th Cir. 2012).
57 Id. at 1319 n.5 (internal quotations omitted).
58 Id. (internal quotations omitted).
59 See K.S.A. §60-2304(c) (granting exemption for “one means of conveyanceregularly used for the transportation of the person or for transportation to and from theperson’s regular place of work”).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 22 of 28
maintenance costs, when Debtors propose no dividend to unsecured creditors, would
hinder the spirit and purpose of the Code.
Debtors respond that retaining the motorcycle is not only necessary—because
Mr. Knowles rides the motorcycle to work in warm weather—but financially wise,
because if required to surrender the motorcycle, Debtors’ transportation expenses
would actually increase due to higher costs associated with the Ford’s poor gas mileage.
Debtors presented evidence that Mr. Knowles rides the Harley motorcycle to work
about 32 weeks a year, from mid-March to late-September or October. Debtors live
about 18 miles from Mr. Knowles’ job, and Mr. Knowles testified that he could make
two weeks’ worth of trips to work on one tank of gas in the motorcycle, but it cost an
additional $60 a week for gas when he drives the truck to work. Mr. Knowles
ultimately claimed that riding the motorcycle saves him about $1920 a year in gas.60
In reaching that conclusion, however, Mr. Knowles failed to consider the other
costs associated with retaining this spare vehicle. Mr. Knowles testified that the
motorcycle’s tags and taxes cost about $200 a year, insurance (at $56.56 per month)
$678.72 a year, and the annual note payment totaled $3096 (at $258 each month). The
actual comparison is, therefore, a questionable $1920 per year gas savings versus a
certain $3,974.72 per year expense of ownership of the motorcycle. And this does not
60 This claimed savings did not compute. Mr. Knowles testified he rode themotorcycle to work approximately 32 weeks a year, and that round trip mileage was 180per week. So over a year, to reach the claimed savings, he would need to drive the cycle towork 5,760 miles. He testified, however, that he purchased the cycle with 3,000 miles 13months ago, and that it now has 6,000 miles. It is thus clear that he is not driving the cyclenearly as much as his “savings” claim, further buttressing my conclusion that not only isthis a luxury item, but that the claimed gas savings are not as significant as claimed.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 23 of 28
account for any additional maintenance costs (or new tires) that Debtors would likely
encounter over a 60 month plan, so the difference is probably even greater.
Debtors’ brief additionally contends that, regardless of whether retention of the
motorcycle is necessary for their maintenance and support, as long as they comply with
the Code’s provisions for retention of secured debt, they have filed their plan in good
faith, citing Judge Berger’s decision in In re Roberts61 and contrasting it to Judge
Nugent’s decision in In re Sandberg. 62 In Sandberg, the above-median debtors proposed
a chapter 13 plan that paid unsecured creditors only a 2.3 per cent dividend, but
proposed to retain and pay for a 36-foot boat.63 Judge Nugent concluded that the boat
was indisputably a luxury item, and that the debtors’ motivation and sincerity with
respect to rehabilitation through their chapter 13 plan weighed in favor of a finding
that the plan was not proposed in good faith.64 Judge Nugent concluded that it was
fundamentally inappropriate to “discharge so much unsecured debt while still
retaining and enjoying a luxury item” and that “[h]olding otherwise would defy the
letter and spirit of chapter 13.”65
In Roberts, the above-median debtors proposed a chapter 13 plan that retained
their expensive home (valued somewhere between $530,000 and $665,000) while
61 493 B.R. 584 (Bankr. D. Kan. 2013).
62 433 B.R. 837 (Bankr. D. Kan. 2010).
63 Id. at 839–41.
64 Id. at 844–45.
65 Id. at 848.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 24 of 28
paying nothing to general unsecured creditors.66 In analyzing whether the debtors’ plan
was proposed in good faith, and citing the good faith factors cited by the Tenth Circuit
in Cranmer, Judge Berger specifically found that the debtors’ documents and schedules
were accurate, and that there were no attempts to mislead the bankruptcy court.67
More importantly, Judge Berger then noted:
Here, the Debtors have attempted to follow the Bankruptcy Code; they
have pared their expenses and share a single car, they have amended
their schedules to more accurately reflect their financial situation, and
they ask to keep their house in which they have lived for eight years. 68
As a result of these findings of fact, Judge Berger found no unfair manipulation of the
Bankruptcy Code, and concluded that the totality of the circumstances indicated that
the debtors filed their chapter 13 plan in good faith in accordance with § 1325(a)(3).69
In contrast, Mr. Knowles testified that his wife drives the Nissan to work, and
that their work shifts do not allow them to ride together. He also testified, however,
that he makes no attempt to utilize the far more fuel efficient/30 mpg Nissan for his
work transportation on days Ms. Knowles does not work (which, most weeks, is four
days, as she is a registered nurse most often working three 12-hour shifts). The facts
also showed that both the Ford F150 and the Harley motorcycle were purchased within
about 15 months of filing bankruptcy—the Ford F150 was purchased in February 2012,
66 493 B.R at 587.
67 Id. at 594–95.
68 Id. at 596 (emphasis added).
Case 13-40602 Doc# 47 Filed 11/04/13 Page 25 of 28
the Harley motorcycle was purchased in August 2012, and Debtors filed their
bankruptcy petition in May 2013. Further, the debt on the Harley—which Debtors
propose to pay in full through the plan—is $14,272.59, but the motorcycle is worth only
As a result of this evidence, I find the totality of the facts in this case are much
more similar to those in Sandberg than to the facts in Roberts. First, by exempting the
Nissan and the Ford F150, Debtors necessarily claim those were the two vehicles
necessary for their transportation to work. For them to now fudge on which vehicle
they actually use most places Mr. Knowles’ testimony in conflict with their sworn
schedules. Second, state law allows the exemption of one vehicle, not 1.5 each as they
essentially want. Third, the Harley motorcycle is indisputably a luxury item. While
they may save some money on gas when Mr. Knowles elects to ride it to work, they
spend far more than they save when considering the overall costs of insurance, tags
and taxes, maintenance and debt payments. Fourth, Debtors admit that they seek to
retain this motorcycle even though retention will require them to pay $3000 more than
it is worth; this makes no financial sense. Fifth, unlike in Roberts where the debtors
hoped to retain their one exempt homestead allowed under Kansas law, instead of two,
these Debtors think they should be able to retain more than state law exemptions
allow. Finally, the debtors in Roberts had pared expenses, contrary to the evidence
here, where in spite of having incurred upwards of $65,000 in unsecured debt, Debtors
purchased not one, but two, vehicles within 15 months of bankruptcy (and the
motorcycle less than 9 months before filing). There is simply no financially responsible
Case 13-40602 Doc# 47 Filed 11/04/13 Page 26 of 28
reason to retain an expensive Harley motorcycle under these facts other than simply
because Debtors like to have it—and this is not enough, especially where Debtors
propose zero dividend to their non-preferred unsecured creditors.
As stated by Judge Nugent in Sandberg, a “primary purpose of the good faith
inquiry is to determine under the totality of the circumstances of a case whether there
has been an abuse of the provisions, purpose, or spirit of Chapter 13.”70 The Court finds
here that permitting Debtors to retain and pay for their third vehicle, a Harley
Davidson motorcycle, at the expense of any dividend to their unsecured creditors, is not
in good faith, but would instead be an unfair manipulation of the Bankruptcy Code.
Debtors have failed to carry their burden under § 1325(a)(3). Like Judge Nugent did
in Sandberg, I question these Debtors’ motivation and sincerity with respect to
rehabilitation through their chapter 13 plan, and find the plan was not proposed in
The Trustee’s objection to confirmation is overruled in part and sustained in
part, as indicated more fully herein. Because of these rulings, Debtors’ plan, as
proposed, cannot be confirmed. Debtors must file an amended plan, tailored to reflect
the rulings contained herein, within 21 days of the entry of this Memorandum Opinion,
if they wish to remain in this Chapter 13 proceeding. Failure to do so will result in the
70 433 B.R. at 845.
71 Id. at 844–45.
Case 13-40602 Doc# 47 Filed 11/04/13 Page 27 of 28
dismissal of their case for undue delay prejudicial to creditors pursuant to 11 U.S.C.
It is so ordered.
# # #
Case 13-40602 Doc# 47 Filed 11/04/13 Page 28 of 28
- Category: Judge Karlin
- Published on 17 October 2013
- Written by Judge Karlin
- Hits: 134
In Re Moses, 12-40195 (Bankr. D. Kan. Oct. 16, 2013) Doc. # 105
SIGNED this 15th day of October, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 12-40195
Mary Carol Moses, Chapter 7
Order Denying Motions to Vacate of Debtor Mary Moses
and Intervenor Ruth Moses
Before me are two contested motions related to a default order entered more
than one year ago, on September 4, 2012 (the “Default Order”), namely: (1) Debtor
Mary Moses’ Motion to Vacate the Default Order on Debtor’s Homestead Exemption;1
and (2) Intervenor Ruth Moses’ Motion to Vacate the Default Order on Debtor’s
Homestead Exemption.2 In an attempt to untangle the web of family ties, the Trustee,
1 Doc. 76. The Trustee objected to this motion at Doc. 77.
2 Doc. 67. The Trustee objected to this motion at Doc. 75.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 1 of 24
along with the Debtor and Intervenor, filed a Joint Stipulation of Facts3 and briefs
supporting their positions.4
After full consideration of those pleadings, I conclude that the motions to vacate
must be denied. Debtor Mary Moses has not carried her burden under Federal Rule of
Civil Procedure 60(b)(1) to show the alleged excusable neglect. Intervenor Ruth Moses
has not demonstrated that she has standing to attack the Default Order, and, even if
she did, she similarly fails to carry her burden under Rule 60(b).
I. Factual and Procedural Background
Debtor Mary Moses, and her sister, the Intervenor Ruth Moses, along with their
father Raymond Moses, moved into real property on Stafford Road in Ottawa, Kansas
in 1988. Debtor and her sister have lived there ever since. In 1992, their father deeded
his interest in the residence to them as joint tenants, with full rights of survivorship.
In 2010, the Franklin County Appraiser’s Office valued the real property at
approximately $200,000. At that time, the residence was “free and clear” of any
mortgage or other type of encumbrance, including real property taxes.
On or about October 1, 2010, Debtor contacted Legal Helpers Debt Resolution
3 Doc. 78 (Stipulation of Facts between Ruth Moses, Mary Moses, and the Trustee).
The parties informed the Court by e-mail at the time the stipulation was filed that the JointStipulation is complete, and no additional evidence is needed.
4 Doc. 84 (Trustee’s Brief in Opposition to Debtor’s Motion to Vacate Default Orderand Ruth Moses’ Motion to Vacate Default Order); Doc. 88 (Intervenor Ruth Moses’ Brief inSupport of Motion to Vacate Default Order Denying Debtor’s Claims of Exemptions); andDoc. 100 (Debtor’s Brief in Support of Debtor’s Motion to Vacate Default Order). Briefing onthis matter has been significantly delayed by several motions for extension of time. Themotion to vacate of Intervenor Ruth Moses, which brought this issue to the forefront, wasfiled May 21, 2013, but full briefing on the issues was not completed until October 8, 2013.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 2 of 24
Service (“Legal Helpers”) seeking options to repay her significant credit card debt,
which exceed $55,000. Debtor entered into a contract with Legal Helpers for its
services in reducing her credit card debt and, in compliance with their formal
agreement, she began forwarding approximately $700 per month for repayment of the
In April 2011, Citibank sued Debtor to obtain a judgment for the unpaid balance
due on the credit card account she had with it. After receiving the summons from
Citibank, Debtor contacted Legal Helpers by phone, and notified a representative that
Citibank had filed the lawsuit and that she was concerned about the lawsuit. During
a phone conversation with Legal Helpers in April or May 2011, Debtor understood the
representative to tell her that if she owned property or had a bank account, that she
should remove her name from the title of those items because of the Citibank lawsuit.
Debtor was not asked by Legal Helpers, and therefore did not inform Legal Helpers,
that she owned an undivided one-half interest in the real property in Ottawa, Kansas.
Because Debtor believed she had received sound legal advice from Legal
Helpers, she completed a quit claim deed form on May 27, 2011, transferring her
interest in the Ottawa, Kansas real property to her sister, Ruth Moses. The quit claim
deed was simultaneously filed with the Franklin County Register of Deeds. Debtor
admits she executed the quit claim deed on the real property in favor of her sister
based upon her understanding of the advice from Legal Helpers. Ruth paid Debtor no
consideration in connection with the transfer of Debtor’s interest via the quit claim
deed, which based on a value of $200,000, may have been worth about $100,000.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 3 of 24
Debtor made all payments to Legal Helpers as agreed until late 2011, when she
discovered Legal Helpers was not in turn paying her credit card debt, as Legal Helpers
had agreed to do. On February 23, 2012, Debtor Mary Moses filed for Chapter 7
bankruptcy protection, claiming a homestead exemption for the Stafford Road real
property. At a continued § 341 meeting in July 2012,5 Debtor testified that she did not
hold an “interest” in the real property, meaning that she did not hold title in the
property. On August 8, 2012, the Trustee filed an objection to Debtor’s Claim of
Exemption of the homestead, along with a notice with a 21-day opportunity to object.6
If Debtor had objected, a hearing would have been set.
The Trustee mailed a copy of her Objection to Exemption and the Notice to
Debtor at her Stafford Road home on August 8, and Debtor freely admits receiving a
copy of this Objection to Exemption and Notice in August 2012. The Court’s docket
sheet also reflects that Debtor’s attorney was sent an electronic copy of both the
Objection and Notice through the Court’s electronic filing system at the electronic
address she maintains with the Court.7
Debtor did not object to the Trustee’s Objection to Exemption. As a result, when
the objection deadline expired, I construed the objection as uncontested, and, on
5 See 11 U.S.C. § 341 (requiring a “meeting of creditors” wherein the trustee “shallorally examine the debtor”).
6 Doc. 33 (Trustee’s Objection to Debtor’s Exemption); Doc. 34 (Notice withOpportunity for Hearing).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 4 of 24
September 4, 2012, entered an Order Denying Debtor’s Claim of Exemption.8 The
Default Order, which was prepared by the Trustee, states that the real property is not
subject to a claim of exemption under Kansas law.
Debtor also admits that she received a copy of the Default Order at her Stafford
Road residence in September 2012, and the Court’s docket sheet shows that Debtor’s
counsel was sent a copy of this order through the Court’s electronic filing system on
September 4, 2012.9 Approximately six months later, on March 21, 2013, the Trustee
filed an adversary proceeding against Debtor’s sister, Intervenor Ruth Moses, seeking
to recover the alleged cash value of the interest the Trustee alleges Debtor improperly
transferred to Ruth Moses.
Apparently in response to the filing of the adversary case against her sister,
Debtor filed a motion to convert her case to one under Chapter 13 on April 11, 2012;10
that motion to convert was set for an evidentiary hearing as a result of the Trustee’s
objection based on good faith.11 Two days before that evidentiary hearing, Ruth Moses
filed a motion to intervene in Debtor’s chapter 7 bankruptcy case12 and a motion to
vacate the Order Denying Debtor’s Claim of Exemption.13 Debtor then filed a motion
8 Doc. 37.
9 Doc. 38.
10 Doc. 57.
11 Doc. 62.
12 Doc. 69.
13 Doc. 67.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 5 of 24
to continue14 the evidentiary hearing on the motion to convert. At a hearing on the
motion to continue conducted one day before that trial, I granted Ruth Moses’ motion
to intervene and the motion to continue the evidentiary hearing. After I questioned
Ruth Moses’ standing at that hearing, Debtor promised to file her own motion to
vacate, which she filed two weeks later.15 I then set a briefing schedule for the motions
As a final preliminary matter, this is a core proceeding and the parties stipulate
this Court has jurisdiction to enter final judgment.16
Debtor Mary Moses’ Motion to Vacate the Default Order on her
Debtor seeks relief from the Default Order granting the Trustee’s objection to
her homestead exemption under Federal Rule of Civil Procedure 60(b)(1). Rule 60 is
applicable to bankruptcy proceedings via Federal Rule of Bankruptcy Procedure 9024.17
14 Doc. 68.
15 Doc. 76.
16 See 28 U.S.C. § 157(b)(2)(A) (stating that “matters concerning the administrationof the estate” are core proceedings that a bankruptcy judge has jurisdiction to hear anddetermine).
This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)
and (b) and by operation of a Standing Order dated August 1, 1984, effective July 10, 1984,
referenced in D. Kan. Rule 83.8.5, wherein the District Court for the District of Kansas
referred all cases and proceedings in, under, or related to Title 11 to the Districts’bankruptcy judges.
17 See Fed. R. Bank. P. 9024 (stating that Rule 60 is applicable to “cases under theCode” except for motions to reopen, complaints to revoke discharge, and complaints torevoke an order confirming a plan).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 6 of 24
Rule 60(b)(1) states:
(b) Grounds for Relief from a Final Judgment, Order, or Proceeding. Onmotion and just terms, the court may relieve a party or its legalrepresentative from a final judgment, order or proceeding for thefollowing reasons:
(1) mistake, inadvertence, surprise, or excusable neglect[.]
The parties do not dispute that the Default Order was a final order, and I find that the
“Order Denying Debtor’s Claim of Exemption” was, in fact, a final order.18 A Rule
60(b)(1) motion to vacate “must be made within a reasonable time,” and “no more than
a year after entry of the judgment or order.” The Default Order that Debtor seeks to
vacate was entered on September 4, 2012, so Debtor’s motion to vacate, ultimately filed
on June 4, 2013, was filed almost ten months after the objection was filed (on August
8), and nine months after the order was entered.
Debtor alleges that Rule 60(b)(1) relief based on excusable neglect is justified
due to a calendaring error made by her attorney, which error was based on her
attorney’s medical condition during the winter of 2012 and spring of 2013. Specifically,
Debtor’s attorney alleges a “severe allergic reaction” in the winter of 2012, that
persisted for seven months. Counsel then alleges that in March 2013 she “developed
a neurological condition” and an injury that exacerbated the problem, requiring
medical treatment from March 2013 through June 2013. The relevant time period for
18 See Clark v. Brayshaw (In re Brayshaw), 912 F.2d 1255, 1256 (10th Cir. 1990)
(“Grant or denial of a claimed exemption is a final appealable order from a bankruptcyproceeding.”); see also Lampe v. Iola Bank & Trust (In re Lampe), 278 B.R. 205, 208 (10thCir. BAP 2002) (“The bankruptcy court’s order regarding the Debtor’s claim of exemption isan appealable order.”).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 7 of 24
the analysis of this motion is August and September of 2012—the months during which
the objection and order were filed and entered, and presumably during the months
following the alleged initial allergic reaction, although this latter fact is not clear.19
Debtor’s attorney alleges slightly different facts in the brief filed in support of
Debtor’s motion to vacate. In that brief, Counsel never mentions a calendaring error,
instead simply stating that she “failed to respond” to the August 2012 objection to
exemption and that “Debtor’s counsel’s health concerns and family turmoil prevented
her from realizing the error.” Her brief claims she suffered from medical conditions in
the winter of 2012, followed by a seven month severe allergic reaction and then a
spring 2013 neurologic problem. The brief then alleges, for the first time, that her
children also had health problems. These had not been mentioned in Debtor’s motion
to vacate; her affidavit states that these health issues occurred “during the first 341
[hearing].” Debtor’s first 341 hearing was in March 2012—some six months before
counsel’s response to the Trustee’s Objection to Exemptions was required, but counsel’s
brief is, frankly, not clear about this timing, and as a result I am unable to determine
19 Equally important to note, Debtor’s allegations are just that, allegations andargument. Despite asking for a Joint Stipulation of Fact concerning the motions to vacate,
the Joint Stipulation actually filed does not in any way address the facts alleged concerningcalendaring errors or medical issues. The parties confirmed that this Joint Stipulation wascomplete, and that they did not need additional evidence to support the motions to vacate.
For that reason, I cannot allow Debtor’s counsel to now add facts to which the Trustee has
not been given the opportunity to consider or consent. See Doc. 100 p.2 (Debtor’s brief insupport of her Motion to Vacate, admitting “[a]ll counsel agreed that there were no disputedfacts in regard to the Motions to Vacate”).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 8 of 24
the exact time frame of Counsel’s children’s health issues.20
Rule 60(b) relief “is extraordinary and may only be granted in exceptional
circumstances.”21 The Tenth Circuit utilizes the following factors to determine
excusable neglect: “the danger of prejudice to the opposing party, the length of the
delay and its potential impact on judicial proceedings, the reason for the delay,
including whether it was within the reasonable control of the movant, and whether the
movant acted in good faith.”22 “The determination of whether a party’s neglect is
excusable is at bottom an equitable one, taking account of all relevant circumstances
surrounding the party’s omission.”23 Debtor bears the burden of demonstrating
excusable neglect, although all doubts in the equitable analysis of excusable neglect
are to be resolved in her favor.24
After examining the pertinent factors, I find that Debtor has not shown
excusable neglect. Although Debtor alleges the Trustee (and thus the creditors of her
estate) would suffer no prejudice from vacating the default order, the Trustee argues
that the entire course of this case, and the related adversary proceeding, has been
plotted based on the Default Order. The Trustee has expended countless hours on these
20 Again, these allegations are not stipulated. Debtor’s counsel has, however,
submitted an affidavit that lays out some of the alleged facts.
21 Marcus Food Co. v. DiPanfilo, 671 F.3d 1159, 1166 (10th Cir. 2011).
22 Id. at 1172 (internal quotations omitted).
23 Segura v. Workman, 351 Fed. App’x 296, 298 (10th Cir. 2009) (unpublished)
(internal quotations omitted).
24 Id. at 1172.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 9 of 24
matters, relying on the finality of the order on Debtor’s homestead exemption.
The length of the delay in this case—the Default Order was entered nine months
before Debtor filed her motion to vacate—and that delay’s impact on the judicial
proceedings, is also not in Debtor’s favor. “Rule 60(b) has dual timeliness standards:
a ‘reasonable time’ standard for all motions filed under 60(b), and a maximum one-year
statute of limitations from entry of the order for motions filed under 60(b)(1).”25
Although Debtor’s motion to vacate was filed within the one-year statute of limitations,
the nine month delay is not reasonable. Debtor has personally known, as has the
attorney she voluntarily elected to hire to represent her, since at least August 2012,
and very likely earlier due to questioning at repeated, continued 341 hearings, that the
Trustee opposed Debtor’s homestead exemption.26 Accordingly, it should not have come
as a surprise to Debtor herself, or her attorney, when the objection to the homestead
exemption arrived in the mail. I may consider “whether the attorney attempted to
correct his action promptly after discovering the mistake.”27 I find there was not a
timely correction made here.
Debtor and her counsel also received actual notice in early September 2012
25 Davis v. Warden, Fed. Transfer Ctr., 259 Fed. App’x 92, 94 (10th Cir. 2007)
(unpublished). See also Cummings v. Gen. Motors Corp., 365 F.3d 944, 954 (10th Cir. 2004)
(noting that the “reasonable time” requirement of Rule 60(b) applies to Rule 60(b)(1), (2),
and (3), and is not necessarily satisfied by filing within one year), abrogated on other
grounds by United Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394 (2006).
26 Debtor’s counsel admits this in her Motion to Vacate when she states, at ¶7, that“Debtor’s counsel repeatedly clarified to the Trustee during the 341 meetings that Debtorbelieved her share of the homestead to be exempt.” Doc. 76.
27 Jennings v. Rivers, 394 F.3d 850, 857 (10th Cir. 2005).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 10 of 24
when the Default Order was entered sustaining the Trustee’s objection.28 In addition,
the dispute about Debtor’s homestead is at the center of this entire bankruptcy case,
so there have been repeated notices of this issue. Even Debtor’s counsel admits in her
motion to vacate that she and the Trustee “conversed through many emails before and
after” the Trustee’s objection was filed,29 and Debtor and her Counsel were notified of
the filing of the adversary case related to the real property in March 2013.
Debtor’s delay has also resulted in significant impact on the judicial proceedings.
I was required to continue the evidentiary hearing on Debtor’s motion to convert
because of the late-filed motions to vacate, which also likely prejudiced the Trustee,
who undoubtedly had already prepared for the trial scheduled to start less than 24
hours later. A “sufficient justification” must be given for any delay in filing a Rule 60(b)
motion,30 and no sufficient justification is shown here.31
Next, I consider the reason for the delay, including whether it was within the
reasonable control of Debtor as movant. “Fault in the delay remains a very important
factor—perhaps the most important single factor—in determining whether neglect is
excusable. . . . Likewise, a court may take into account whether the mistake was a
28 Debtor admits receiving both the objection and Default Order at her home
29 Doc. 76 at 2, ¶ 9.
30 Sorbo v. United Parcel Serv., 432 F.3d 1169, 1178 (10th Cir. 2005).
31 See, e.g., Calhoun v. Schultze, 197 F.R.D. 461, 463 (D. Kan. 2000) (calling a delayof three months “significant;” failure to respond caused court to grant unopposed motionand cancel pretrial conference).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 11 of 24
single unintentional incident (as opposed to a pattern of deliberate dilatoriness and
delay).”32 Although Debtor’s failure to respond was a singular mistake, and not one in
a series of dilatory tactics, I find that the fault for the delay in this case must reside
with Debtor and her Counsel.33
Even if her attorney’s calendaring error was the cause of the attorney’s failure
to timely respond to the Trustee’s motion, there is simply no explanation why Debtor
failed to respond at all, even after receiving the Default Order, and why she ignored
this matter for the subsequent nine months. The stipulated facts show that Debtor is
employed at Washburn University as a Transcript Analyst,34 so she is apparently well
able to read, write and otherwise communicate with her Counsel. And Debtor admits
she also personally received both the Trustee’s Objection to Exemption and the Court’s
Default Order at her home address. What is missing from her argument is why she
then elected not to contact her attorney to question why her attorney had failed to
oppose the objection to exemptions, or to promptly seek relief from the Default Order
regarding the exemptions.
Although Debtor’s Counsel’s attempts to explain her own failure to respond
based on a calendaring error due to her own medical problems, she does not attempt
32 Segura v. Workman, 351 Fed. App’x 296, 298–99 (10th Cir. 2009) (unpublished)
(internal quotations omitted).
33 Clients must “be held accountable for the acts and omissions of their chosen
counsel.” Pioneer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P’ship, 507 U.S. 380, 396 (1993).
34 Doc. 78, Stipulation No. 8. Debtor’s sister, Ruth, with whom she lives, is a SeniorAdministrative Assistant with the Kansas Corporation Commission. Stipulation 7.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 12 of 24
to explain why she did not immediately react after receiving the Court’s Order Denying
Debtor’s Claim of Exemptions on September 4, 2012.35 While I am very sympathetic
with Counsel’s series of medical ailments, under these facts, this is insufficient:
“Parties desiring relief must particularize, and generally do not acquit themselves of
responsibility by showing merely that they placed the case in the hands of an
attorney.”36 Indeed, “[c]arelessness by a litigant does not afford a basis for relief under
Rule 60(b)(1).”37 And Counsel has not made it clear whether her own, or her children’s,
health problems overlapped the pertinent time period.38
Finally, I must assess whether Debtor has acted in good faith throughout this
litigation, and I find that this factor also does not favor Debtor. Although not explicit,
Debtor’s motion to vacate actually implies that the failure to timely respond to the
objection to exemption or the Default Order was a strategic choice.39 Debtor’s Counsel
35 See, e.g., United States v. Williams, 257 Fed. App’x 65, 68 (10th Cir. 2007)
(unpublished) (affirming decision of lower court that even a complete failure to know abouta court order “did not justify her complete failure to check up on the status of an on-goingIRS proceeding”).
36 Pelican Prod. Corp. v. Marino, 893 F.2d 1143, 1146 (10th Cir. 1990).
37 Calhoun v. Schultze, 197 F.R.D. at 462 (citing Pelican Prod. Corp. v. Marino, 893
F.2d 1143, 1146 (10th Cir. 1990)).
38 For example, counsel alleges a “severe allergic reaction” in “winter 2012,” withlingering symptoms for seven months. But this time frame is so vague that the Courtcannot determine that it even overlaps the relevant August to September 2012 time frame.
Even if these facts were more clearly presented, the parties agreed that their Stipulation ofFacts was complete, and those facts do not contain any evidence about counsel’s medicalproblems.
39 The Trustee also notes in her brief that while Debtor’s counsel argues that hermedical issues reasonably prevented her from responding to the initial Objection toExemptions or in timely moving to vacate the resulting Default Order, that Debtor’s
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states that “Counsel believed resolution would be obtained by converting to a Chapter
13. After meeting with counsel for [Ruth Moses] and deciding upon another course of
action, it was necessary to respond to Trustee’s objection to Debtor’s Exemptions.”40
Frankly, it strains credulity to think that Debtor’s Counsel only realized that an order
was entered on an adverse objection to exemption at the time the motion to vacate was
filed, given that the real property exemption had been front and center of this
bankruptcy case from the beginning. The more likely scenario seems to be that Debtor
and her Counsel chose not to fight the exemption, and planned all along to convert if
an adversary was filed. But when Debtor’s sister became involved after the Trustee
filed the adversary proceeding, they elected a new litigation tactic. “[A] party who
simply misunderstands or fails to predict the legal consequences of his deliberate acts
cannot later, once the lesson is learned, turn back the clock to undo those mistakes.”41
Debtor has not carried her burden to show excusable neglect that justifies
vacating the Court’s Order. Debtor did not show that “culpable conduct did not cause
the default.”42 Debtor’s motion to vacate43 is denied.
counsel was nevertheless medically able to file other pleadings in the case, referring to aRequest for Transcript, Doc. 35, filed August 14, 2012. See also Doc. 50, Debtor’s Objectionto Motion for Turnover filed December 31, 2012 (five months before Debtor’s counsel filedthe Motion to Vacate).
40 Doc. 76 at 4, ¶ 19.
41 Yapp v. Excel Corp., 186 F.3d 1222, 1231 (10th Cir. 1999).
42 Zimmerling v. Affinity Fin. Corp., 478 Fed. App’x 505, 508 (10th Cir. 2012)
(unpublished) (internal quotations omitted).
43 Doc. 76.
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Intervenor Ruth Moses’ Motion to Vacate the Default Order on
Debtor’s Homestead Exemption
Intervenor Ruth Moses argues that the Default Order on Debtor’s Homestead
Exemption should be set aside based on Rule 60(b)(6). Rule 60(b)(6) permits a court to
“relieve a party or its legal representative from a final judgment, order, or proceeding”
for “any other reason that justifies relief.” Ruth Moses argues she is entitled to relief
because: (1) she did not have notice of the Trustee’s objection to exemption, “or any
information that would signal to [Ruth] that her interests in the property rights of her
home were in jeopardy,” and was “substantially prejudiced” by the Default Order; and
(2) the Default Order misstates Kansas law, because it states that “under Kansas law,
the Debtor is prohibited from exempting real property which the Debtor does not own
and, therefore, the Real Property is not subject to a claim of exemption under Kansas
law.” The Trustee responds that Intervenor Ruth Moses lacks standing to seek relief
from the Default Order because she was not a party to that order. The Trustee also
argues that Intervenor cannot meet her burden under Rule 60(b).
I must first assure myself that Intervenor Ruth Moses has standing to challenge
the Default Order.44 Standing jurisprudence encompasses both constitutional standing
and jurisdictional standing.45 Constitutional standing requires the presence of a “case
44 See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 102 (1998) (detailing thelimit of courts’ jurisdiction and the requirement of standing to sue).
45 The Wilderness Soc’y v. Kane County, Utah, 632 F.3d 1162, 1168 (10th Cir. 2011)
(“The Supreme Court’s standing jurisprudence contains two strands: Article III standing,
which enforces the Constitution’s case-or-controversy requirement, and prudential standingwhich embodies judicially self-imposed limits on the exercise of federal jurisdiction.”
(internal quotations omitted)).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 15 of 24
or controversy,” and requires that the individual has suffered “an ‘injury in fact’ that
a favorable judgment will address.”46 Prudential standing requires that the litigant
assert its own particular rights, and forbids a litigant from “‘rest[ing] his claim for
relief on the legal rights or interest of third parties.’”47
Admittedly, a joint tenant can be a party in interest concerning real estate, and
assert his or her rights to co-owned property of the estate. For example, a Tenth Circuit
BAP case, In re Kasparek, 48 discusses a joint tenant’s rights to contest a chapter 7
trustee’s motion to sell under § 363 of the Code. In Kasparek, however, the joint tenant
had his own real property interest at stake: the trustee was seeking to sell not only the
Debtor’s interest in the property, but also the joint tenant’s interest, and the joint
tenant was a named defendant in the adversary case being appealed.49
No party has cited to any case, however, that supports the Intervenor’s standing
to vacate a default order on the Debtor’s claim of a homestead exemption. Intervenor
Ruth Moses claims that her intervenor status makes her a party in interest, and
permits her to challenge the Default Order, based on the case of Ruiz v. Estelle. 50 In
46 Id. (quoting Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 12 (2004)); see
also Steel Co., 523 U.S. at 103–04 (“This triad of injury in fact, causation, and redressabilityconstitutes the core of Article III’s case or controversy requirement, and the party invokingfederal jurisdiction bears the burden of establishing its existence.”).
47 Id. (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)).
48 426 B.R. 332 (10th Cir. BAP 2010).
49 Id. at 339–40. There is no actual reference in Kasparek to standing. Kasparek is
merely an example case where a joint tenant pursued remedies from a bankruptcy court.
50 161 F.3d 814 (5th Cir. 1998).
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Ruiz, the Fifth Circuit considered intervention in a prison conditions lawsuit under
Federal Rule of Civil Procedure 24(a)—intervention of right—based on a provision of
the Prison Litigation Reform Act that granted a right to intervene to state legislators.51
The Ruiz Court analyzed the statutory intervention language, and concluded that the
individual legislators were given an unconditional right to intervene in the prison
litigation.52 The Court then examined the constitutionality of the statutory intervention
language, based on the argument that granting legislators the right to intervene would
violate Article III of the Constitution for lack of the legislators’ standing.53 The Ruiz
Court concluded that Article III did not require the intervenors to independently
possess standing where the intervention was into a subsisting and continuing Article
III case or controversy, and the relief sought by the intervenors was “also being sought
by at least one subsisting party with standing to do so.”54
51 Id. at 816–18.
52 Id. at 821.
53 Id. at 828–29.
54 Id. at 830 (relying on Diamond v. Charles, 476 U.S. 54, 64 (1986)). The TenthCircuit discusses the same rule in San Juan County, Utah v. United States, 503 F.3d 1163
(10th Cir. 2007).
The Supreme Court has recently analyzed the Diamond case, the Supreme Courtcase upon which Ruiz relies, and limited it to the conclusion there present—that apediatrician engaged in private practice was not permitted to defend the constitutionality ofan abortion law after the state chose not to appeal an adverse ruling—when it ruled in
Hollingsworth v. Perry, 133 S. Ct. 2652, 2668 (2013), that a private party does not havestanding to defend the constitutionality of a state statute. In Hollingsworth, the SupremeCourt reiterated that a “party must seek a remedy for personal and tangible harm.” Id. at
2661. See also Arizonans for Official English v. Arizona, 520 U.S. 43, 65 (1997) (“Anintervenor cannot step into the shoes of the original party unless the intervenorindependently fulfills the requirements of Article III.” (internal quotations omitted)).
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The intervenor in this case takes the language from Ruiz too far. The Ruiz Court
held that a party seeking to intervene under Rule 24 need not establish Article III
standing as long as another party with constitutional standing remained in the case
on the same side as the intervenor. But this standing to intervene is not the same as
standing to challenge a default order. The longstanding doctrine of prudential standing
requires that each party assert his or her own individual and particular rights, and
forbids a litigant from “‘rest[ing] his claim for relief on the legal rights or interest of
third parties.’”55 Simply stated, prudential standing forbids Ruth from asserting her
sister Mary’s rights.56
Here, although Intervenor and Debtor are related, there is no connection
between an order overruling Debtor’s claim of a homestead exemption and the
Intervenor—the order ruled on the Debtor’s rights, not the Intervenor’s rights. The
Intervenor can still assert her own homestead exemption in any proceeding.
Furthermore, Intervenor certainly does not have standing to make Debtor’s arguments
for her, which is what Intervenor is asking this Court to allow. Intervenor Ruth Moses
is not arguing that her own rights were impacted by the Default Order, just that her
sister, Mary Moses’ rights were impacted. These are arguments that Debtor Mary
Moses could have, and should have, made for herself.
55 The Wilderness Soc’y v. Kane County, Utah, 632 F.3d 1162, 1168 (10th Cir. 2011)
(quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)).
56 See Raley v. Hyundai Motor Co., Ltd., 642 F.3d 1271, 1275 (10th Cir. 2011)
(noting that prudential standing requires that an individual not “seek to pursue anotherperson’s legal rights, litigate a mere generalized grievance, or raise a challenge fallingoutside the zone of interests protected by the law involved”).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 18 of 24
The Tenth Circuit has recently addressed the problem presented when parties
who are indirectly affected by bankruptcy court orders attempt to mire a bankruptcy
case in endless litigation.57 The Tenth Circuit in Krause discussed the additional
prudential standing requirement for appeals from bankruptcy court orders that the
party appealing be a “person aggrieved” by the bankruptcy court order being appealed.
The Tenth Circuit noted that this requirement has been maintained “because, without
such a requirement, bankruptcy litigation could easily ‘become mired in endless
appeals brought by a myriad of parties who are indirectly affected by every bankruptcy
court order.’”58 The Tenth Circuit then stated:
‘Bankruptcy proceedings regularly involve numerous parties, each ofwhom might find it personally expedient to assert the rights of anotherparty even though that other party is present in the proceedings and iscapable of representing himself. . . . In this context, the courts have beenunderstandably skeptical of the litigant’s motives and have often deniedstanding as to any claim that asserts only third-party rights.’59
Although not dealing with a matter on appeal, the Circuit’s reasoning applies equally
here. Intervenor Ruth Moses seeks to assert the homestead rights of Debtor Mary
Moses. Mary Moses is represented by counsel and is bound by the choices she has made
in this litigation. Clearly, her sister would have made different choices, but the fact
remains that Debtor Mary Moses was the one whose exemptions were affected by the
57 United States v. Krause (In re Krause), 637 F.3d 1160, 1167–69 (10th Cir. 2011).
58 Id. at 1168 (quoting Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939, 940 (10thCir. 1989)).
59 Id. (quoting Kane v. Johns-Manville Corp., 843 F.2d 636, 644 (2d Cir. 1988)).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 19 of 24
Default Order, not any property right of Intervenor Ruth.60
Even if Intervenor Ruth Moses had standing to challenge the Default Order
entered against Debtor Mary Moses, she also has failed to meet the Rule 60(b)
standards for vacating that Default Order. Although in her motion to vacate, she
mentions both Rule 60(b)(4) and Rule 60(b)(6), her support brief never actually
articulates under which provision of Rule 60(b) she proceeds. Because she repeatedly
argues that the Default Order should be vacated in the interest of justice, however, I
will assume Intervenor is proceeding under Rule 60(b)(6).
Rule 60(b)(6) permits a court to vacate an order based on any “reason that
justifies relief.” Although relief under Rule 60(b)(6) is reserved for extraordinary
circumstances, “the rule should be liberally construed when substantial justice will
thus be served.”61 The decision on a Rule 60(b)(6) motion is a discretionary decision.62
Intervenor claims she is entitled to relief under this provision because she did
not have notice of the original objection to Debtor’s claim of exemption, and thus was
not notified before the Default Order was entered. She also claims the Default Order
was based on statements by the Trustee in her objection to exemption that are not
supported by Kansas law.
60 The Court had no jurisdiction over Intervenor Ruth Moses when the DefaultOrder was entered, and the Default Order cannot have possibly affected Intervenor RuthMoses’s rights. This Court only has jurisdiction to alter the rights of Ruth Moses in theadversary proceeding that has since been filed against her by the Trustee in this case.
61 McGraw v. Barnhart, 450 F.3d 493, 505 (10th Cir. 2006) (internal quotationsomitted).
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The Court questions the timeliness of the Intervenor’s motion to vacate. As
previously noted, the Default Order that is the subject of this dispute was filed in
September 2012. Intervenor Ruth Moses asserts she first learned of this dispute when
she was served with summons in the adversary proceeding on or about March 26,
2013.63 She asserts this notwithstanding she and her sister live in the same home and
apparently commute to work every work day with one another in their only, shared
car,64 and notwithstanding, as Ruth claims, “The Sisters have a very close relationship
and have shared a residence together nearly all of their lives.”65 Even using the March
2013 date, however, she then waited almost two months—until May 21, 2013—to file
her motion.66 Although the parties’ extensive Joint Stipulation of Facts implies that
Ruth Moses has or should have known for some time about the Trustee’s objection to
Mary Moses’ exemption of the property, Rule 60(c)(1) requires only that a motion to
vacate be filed “within a reasonable time.” The time lapse here was not significant
63 See Doc. 5 in AP 13-7007, showing service of summons was mailed to Intervenoron March 26, 2013.
64 Doc. 78 ¶ 9, ¶ 48 (Joint Stipulation).
65 Ruth Moses’ Motion to Intervene, Doc. 69 ¶ 1, and again in her Brief in Support ofMotion to Vacate, Doc. 88 p.2. The parties also stipulate that Ruth and Mary share livingexpenses, jointly care for their shared vehicle, and even share bank accounts where bothdeposit their paychecks and pay bills. Doc. 78 ¶ 45, ¶ 49.
66 The Trustee’s objection to Debtor’s Motion to Convert states that she made“demand upon Ruth Moses to recover the value of the transfers and the demand has goneunsatisfied.” Doc. 62 ¶ 24. The objection seems to discuss the time line of the case inchronological order, suggesting that even before the Trustee served Ruth Moses with theMarch 21, 2013 adversary complaint, that the Trustee had contacted Ruth demandingrepayment of the alleged transfer pursuant to 11 U.S.C. § 548. Accordingly, although I neednot, and do not, rely on this fact to decide these motions, it certainly seems possible thatRuth Moses knew about all of this before March 21, 2013.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 21 of 24
enough to wholly ban consideration of the motion.
A movant seeking relief under Rule 60(b)(6), however, must show “extraordinary
circumstances justifying the reopening of a final judgment.”67 “Rule 60(b)(6) relief is
difficult to attain and is appropriate only when it offends justice to deny such relief.”68
The only circumstances Intervenor Ruth Moses alleges are not extraordinary.69
First, she argues that she was not given formal notice of the Trustee’s objection to
exemption, or the resulting Default Order. But the Trustee had no obligation to give
non-parties to this bankruptcy case any notice of her objection to the Debtor’s claimed
exemptions. Intervenor cites to no provisions of the Bankruptcy Code or the Federal
Rules of Bankruptcy Procedure that require notice to a joint tenant when a Trustee
challenges the Debtor joint tenant’s exemption of property. To the contrary, Federal
Rule of Bankruptcy Procedure 4003(b)(4) specifically delineates who shall receive
notice of objections to exemptions, and requires notice only to “the trustee, the debtor
and the debtor’s attorney, and the person filing the [exemption] list and that person’s
Intervenor Ruth Moses’ second argument for relief—that the Default Order is
based on misstatements of Kansas law—is also not sufficient to justify relief under
67 Gonzalez v. Crosby, 545 U.S. 524, 535 (2005).
68 Morales v. Jones, 480 Fed. App’x 898, 901 (10th Cir. 2012) (unpublished) (internalquotations omitted).
69 See Cashner v. Freedom Stores, Inc., 98 F.3d 572, 580 (10th Cir. 1996) (“Reliefunder Rule 60(b)(6) is appropriate when circumstances are so unusual or compelling thatextraordinary relief is warranted, or when it offends justice to deny such relief.” (internalquotations omitted)).
Case 12-40195 Doc# 105 Filed 10/15/13 Page 22 of 24
Rule 60(b)(6). “Courts have found few narrowly-defined situations that clearly present
‘other reasons justifying relief’ under Rule 60(b)(6).’” 70 Generally, for example, courts
have granted relief under this Rule when a party shows fraud by the party’s own
counsel, failure to receive notice of judgment in time to file an appeal, or cases of
extreme hardship where adequate redress is prohibited.71 These facts are simply not
present here. Intervenor Ruth Moses has neither argued, let alone demonstrated, that
she has experienced “extraordinary circumstances” justifying vacatur of the Default
Order. Ruth Moses is not even a party to the order, and her personal rights are not
determined by that Default Order. The burden under Rule 60(b)(6) is steep, and Ruth
Moses has not met it here.
I deny both the motion to vacate of Debtor Mary Moses,72 and the motion to
vacate of Intervenor Ruth Moses.73
There are two motions that remain pending: Debtor’s motion to convert her case
to one under Chapter 13 of the Bankruptcy Code,74 and the Trustee’s motion for
70 11 C. Wright, A. Miller, & M. Kane, Federal Practice & Procedure § 2864 at351–52 (2d Cir. 1995).
72 Doc. 76.
73 Doc. 67.
74 Doc. 57. The Trustee’s objection to this motion is Doc. 62.
Case 12-40195 Doc# 105 Filed 10/15/13 Page 23 of 24
turnover, seeking $2416.46 from bank account funds Debtor held on the filing date.75
The Court sets both these motions for evidentiary hearing on the Court’s stacked
docket on November 21/22, 2013. Trial briefs are due on November 15, 2013.
It is so ordered.
# # #
75 Doc. 46. Debtor’s objection to this motion is Doc. 50.
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